FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 13, 2021

IN THIS ISSUE:

1. President Biden’s New Plan To Raise Middle Class Taxes

2. How Key Rules Will Change To Raise Taxes On Middle Class

3. Elimination of “Stepped-up Basis” Bad For Middle Class

4. Keep All Your Financial Information in One Secure Place

Overview – President Biden’s New Plan To Raise Middle Class Taxes

President Biden’s repeated promise to raise taxes only on the richest Americans – those making $400,000 or more a year – cannot possibly be upheld if he is successful with the centerpiece of his proposed new tax plan. That, of course, is to repeal the Tax Cuts and Jobs Act (TCJA) passed during the Trump administration.

The primary effect of President Trump’s TCJA was to reduce taxes for Americans in the bottom 80% of the income distribution. Put another way, the top 20% of earners were the only ones who did not get a tax cut under the TCJA. Americans earning between about $40,000 and $80,000 per year benefited most from the TCJA, and millions of others at the lowest income levels were taken off the tax rolls altogether (no tax paid).

President Biden, along with House and Senate Democrats, have pledged to reverse all that. They won’t admit it, of course, but today’s discussion tells you what you need to know.

Finally, at the end of today’s letter, I will tell you about a cool way to store your financial information regarding your investments in one safe, secure and digital format. The service is called Your Financial Life and we’re making it available FREE of charge to all clients and readers.

Let’s get started.

How Key Rules Will Change To Raise Taxes On Middle Class

Here’s one big way: President Biden vows to eliminate the so-called “stepped-up basis” rule for inherited property. The president refers to this as a “loophole” which allows the rich to “game the system.” Yet it is NO loophole! In fact, it is a specific rule of law under Internal Revenue Code §1014. This law was not a part of the TCJA. It has been on the books since 1954 but is only now under attack by Democrats looking for ways to take more of our money.

Here’s how it works.

Suppose your parents own a home worth $200,000. They purchased the home decades ago for, say, $50,000. If they gift the home to you prior to their passing, your basis in the home is the same as theirs: $50,000. That means if you sell the home for its current value of $200,000, you must pay capital gains tax on the profit of $150,000 – the difference between basis and sale price.

By contrast, if you inherit the home after their death, your basis is equal to the fair market value of the property as of the date of death – in this example, $200,000. [See: IRS Code §1014(a)(1).] Now if you sell the property for $200,000, there is no capital-gains tax because there’s no gain (sale price minus basis equals gain).

This is what we refer to as the stepped-up basis. And the rule absolutely does not apply only to “rich people.” The operation of Code §1014 is not controlled by one’s annual income, the value of the inherited asset or the total value of one’s estate. It applies across the board. Every American taxpayer enjoys the benefit of stepped-up basis on inherited property.

If Code §1014 were repealed in its entirety, all gains on inherited property would be taxed at the capital-gains rate. In general, the gain would be calculated on the difference between the sale price and the price at which the deceased person paid for it (plus any capital improvements that add to the cost basis).

To go back to the parents’ home example: Let’s say the parents paid $50,000 for it originally, and transferred it to you before their death. Subsequently, you sell the house for $200,000; in that case, the $150,000 profit would be subject to capital gains tax. This is precisely what the Biden administration wants to eliminate the stepped-up basis rules to collect more taxes.

One possible consolation, however, is the White House has hinted it might be contemplating exempting the first $1 million in unrealized gains from these new rules. This would be nice, of course, but I will be quite surprised if President Biden and the Democrats actually do it. In addition, you can expect the capital gains tax bill to be calculated at a much higher rate than  currently in effect.

The point is, the elimination of stepped-up basis will be a huge tax increase for millions of Americans – and not just wealthy people – despite Biden’s lies to the contrary.

Elimination of Stepped-up Basis Bad For Middle Class

According to Gallup, as of 2017, 82% of Americans over age 65 own their own homes. That is the highest rate of homeownership for any age group. When these people die, their property most often passes to their heirs. With Baby Boomers increasingly passing away in the next decade, economists and demographers predict a gigantic transfer of wealth in the years just ahead.

Yet if President Biden and the Democrats have their way, the coming huge wealth transfer will be: NOT from parents to children (as it should be) – but from parents to the federal government!

There are currently some limited ways to reduce the impact of the step-up rules which you may want to explore with your accountant. However, we are not at all confident this limited relief will endure – considering how desperate the federal government is for increased revenues in light of the multi-trillion-dollar spending spree which has gone on for the past year.

On another note: Keep a close eye on the “estate tax,” too. In 2021, estates valued under $11.7 million are NOT subject to the estate tax. But if President Biden has his way, that threshold will be slashed to just $3.5 million, and the rate of tax increased to 45% (from 40% now).

Bottom line: So much for tax hikes on “only the rich” as President Biden repeatedly promises. What else is new?

Keep All Your Financial Information in One Secure Place

With income tax time upon us, I want to remind all of my clients and readers that we have a great tool for keeping all of your financial information digitally in one safe, secure place. It’s called Your Financial Life and it’s FREE of charge from Halbert Wealth Management.

The idea is to have all of your financial information (account numbers, custodians, contact info, etc.) in one digital place for easy access. When there are changes to any of your financial information, you can easily update your record to keep it current.

You can download either of two digital versions of Your Financial Life, one in Microsoft Word format and a second which can be completed using the free version of Adobe Reader (available at www.adobe.com).

Either version can be used to save your important information. The file can be password protected and then be easily stored on a removable disk or flash drive and placed in a secure location that can be accessed by those who need it.

And speaking of those who need it, think YOUR SPOUSE. I can’t tell you how many times over the years when a wife has called us after her husband (our client) suddenly passed way, and she has little or no idea where the family’s investments are held, much less what (if anything) to do with them. We are happy to help them sort it all out and make a plan for going forward.

Important Note: If you are a client of Halbert Wealth Management please make sure your spouse knows to CALL US before making any decisions on the investments you hold with us. We often see surviving spouses decide to liquidate all of the investments simply because they do not understand them, even if doing so may be harmful.

We will not only educate them about the reasons you have investments with us and determine if they are still suitable. We want to help you make the best decision however we can.

Download your FREE copy of Your Financial Life today. I really encourage you to do this and make sure your chosen loved ones know where this critical information is stored. I also recommend that you encourage your loved ones to download Your Financial Life to store their own financial information in one safe, secure place.

With tax time approaching, now may be the time to gather up your financial information (account numbers, custodians, contact info, etc.) and enter the info into our FREE Your Financial Life soon. Remember it is very easy to update all your information as things change. And we’ve also included space for you to make comments or notes regarding each investment.

So, download the program today and resolve to get your financial information entered as soon as possible. I promise you’ll be glad you did. And your spouse will be happy, too!

Very best regards,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.