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  • Writer's pictureJulie Skye

this last Week of September 2020 thoughts...taxes, Zombies and an Apple fell.

Updated: Feb 4, 2021

“Sometime in the next 18 months, a combination of technology, capital, expertise and brilliant people will win the vaccine battle.” Geoffrey Porgies

We are all worried income taxes will go up if Joe Biden is elected: I thought you would like to hear how few Americans will be impacted by a change in administration. The centerpiece of candidate Biden’s proposed changes to ordinary income tax brackets is a pledge not to increase tax rates on those making less than $400,000, and that various changes – from new income tax brackets and restrictions on deductions – would only impact earnings above the $400,000 threshold.

😊 Why does this matter to you? The Democratic platform may not resonate with you, but most taxpayers can stop worrying they will see an increase in their income taxes if the democrats win the election. Want to read more? Find Michael Kitce’s summary of the Biden Tax Plan below at the end of this newsletter.

Just in time for Halloween…the Zombies are on the march. The pandemic has increased the number of “zombie companies”—unprofitable, cash-poor firms that rely on the financial markets to cover their costs. 😲 Why does this matter to you? Companies that cannot cover interest costs twice, with last year’s pretax earnings, have a substantially higher chance of failing. One of the big concerns now is that fall will bring another round of COVID cases. Another is that those who are unemployed are hurting because they have lost the extra weekly benefit. Some of our neighbors are barely holding on: hopes ran out on Wednesday but came back to life today. It is hard to tell which companies are “the walking dead” but our managers are our saving grace.

If you are relieved markets have recovered as they have but are nervous about the disconnect between what is happening on Main Street and what the stock market is doing? Cash management is the key to sleeping at night. 😊 Why does this matter to you? If you want to reduce the worry that volatile markets bring, keep 3 years of the income you will need to fund your lifestyle, in cash or short-term bonds. I have new solutions on how to make the most of this low-risk-cash-cushion. Skye 2.0 will roll out in the 4th Quarter…look for details soon!

We have experienced a classic bubble in the U.S. stock market, but the euphoria phase may have crested in August, as the bubble began deflating in September. We have had 5 down weeks and many of the leading tech companies I have been writing about are now trading below their 50-day moving averages (see the “mountain / valley chart” below). Combined with index fund outflows, trader’s nerves are on edge. ☹ 😊 Why does this matter to you? If everybody indexed, the only word you could use is chaos, catastrophe: the markets would fail." John Bogle, May 2017!!! If you are overweight in the names that were yesterday’s winners, you are setting yourself up for poor real returns for the foreseeable future. This developing scenario is still not clear right now, as the S&P 500 Index only been down four weeks, with a very modest decline this past week.

Reducing how much news you consume might be the key to your sanity. Do not hesitate to find time on my schedule about anything on your mind!

Constancy noun con·​stan·​cy | \ ˈkän(t)-stən(t)-sē

Steadfastness of mind under duress: fortitude, fidelity, loyalty. A state of being constant or unchanging: steadfastness of mind under duress; dedication and devotion. In short supply. Synonym ­­- Skye Advisors

The Biden Tax Plan: Proposed Changes And Year-End Planning Opportunities September 30, 2020 07:02 am

When President Donald Trump oversaw the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, substantive tax reforms were made with the intention of promoting economic growth that affected corporations, small businesses, and individuals. With the upcoming election in November, though, former Vice President and Democratic presidential nominee Joe Biden has proposed a tax plan that challenges several aspects of the current system in an effort to increase Federal tax revenues and address income/wealth inequality.

One of the key features of Joe Biden’s proposed plan is for ordinary income brackets to be adjusted for individuals with annual incomes over $400,000 (although whether this threshold applies to individuals or joint filers remains unclear), increasing the top tax bracket to the pre-TCJA rate of 39.6%. The income brackets for those with annual income levels under $400,000 will remain unaffected.

Biden’s plan also includes the elimination of the Qualified Business Income (QBI) tax deduction for pass-through business owners (e.g., partnerships, LLCs, S corporations, and sole proprietors) whose individual annual income is $400,000 or more, in effect, potentially increasing the tax bracket for high earners by 10% (from 29.6% for those eligible for the QBI deduction to the proposed highest rate of 39.6%). The plan would also cap the value of the rate at which itemized deductions can be taken to 28%, which affects those in the tax brackets above 28%, as their rate to determine itemized deductions would be reduced from their income tax bracket.

Another feature of Biden’s tax plan is a flat retirement contribution credit, as determined by a specific percentage (currently anticipated to be 26%) of the contribution amount to replace deductions of those retirement account contributions. This would, in effect, lower the tax burden for taxpayers in tax brackets under the proposed set rate (incentivizing taxpayers in lower tax brackets to contribute to tax-deferred retirement accounts), while increasing it for taxpayers in brackets over the proposed rate. Financial advisors who want to prepare for an expected Biden victory might consider accelerating income and deductions into 2020 for high-income earners because, for this group, income tax rates may be higher and deductions not as favorable if the passage of Biden’s tax plan does come to fruition. Accordingly, year-end Roth conversions may be a good strategy for some high-income earners to forgo the 26% credit in the present for the benefit of tax-free distributions in the future.

Enhancements to personal income tax credits made by the proposal include a higher Child Tax Credit (increased from $2,000 for children under 17 to $3,600 for children under 6 and $3,000 for all other children under 17), Child and Dependent Care Credit (from $3,000 to $8,000 for one child, and from $6,000 to $16,000 for two or more). The First-time Homebuyer Credit would be reintroduced as a refundable and advanceable credit of up to $15,000, and a brand-new proposed Caregiver Credit would provide $5,000 for informal long-term caregivers.

Long-term capital gains and qualified dividend tax rates would increase to ordinary income tax rates for income over $1 million under the proposed Biden plan (with the 3.8% surtax on net investment income to remain in place), and 1031 Exchanges would be eliminated for taxpayers with annual income over $400,000. Some strategies to mitigate the impact of these proposed changes would be to target lower annual capital gains realized, use municipal bonds for their (largely) tax-free character, reduce investments in the portfolio that produce dividends, take advantage of the tax deferral of investment-only variable annuities (for accredited investors, Private Placement annuities can also be a useful option), and use installment sales to regulate annual income levels, keeping them under $1 million as much as possible.

Additionally, Biden’s tax plan proposes to eliminate the step-up in basis rules that currently apply to inherited assets (that are not considered Income In Respect of a Decedent), which would impact both higher- and lower-earners potentially facing a significant and problematic tax bill on inherited assets. Thus, life insurance could see renewed potential as a tool to provide liquidity and/or mitigate the burden of a high tax liability resulting from the inheritance. Alternately, a more structured sale or gifting strategy throughout the owner’s lifetime can be a good way to mitigate taxes for the beneficiary should Biden’s plan pass.

A final key feature of the proposed tax plan would be a 50% reduction of the exclusion amount for estate and gift taxes, from $11.58 million to the pre-TCJA amount of $5.79 million. To be cautious, advisors may want to encourage their clients to use as much of their exemption in 2020 in case Biden is elected to office and his tax plan is approved. Other strategies that can be considered to deal with a smaller exemption in the long-term can potentially include the use of Grantor Retained Annuity Trusts (GRATs), Charitable Lead Annuity Trusts (CLATs), and sales to Intentionally Defective Grantor Trusts (IDGTs).

Ultimately, the key point is that even though there is much that can be planned for at this stage prior to the election – regardless of who wins the race – the most important thing for advisors to do in the present moment is to educate themselves (and their clients) about the impact that each candidate’s position will have on them, and to help them plan accordingly as election results come in! Read more here:

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