$3.5 Trillion Spending Plan - What you need to know! Episode 1 of 3

Hey everybody, welcome to We're Talking Money. Got another great show, a new series that we're kicking off this week on the new tax changes that are coming down the pike from Washington. Dustin, welcome aboard. Got a lot to talk about.

Lots to talk about. This is our new three-part series, this is part one. There's a lot of moving pieces, and so we're just gonna try to condense them, keep the episodes a little bit shorter, but a lot of great information even in this first episode. Looking forward to talking to you. We'll be right back, so stay tuned.

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Hey everybody, welcome. We're Talking Money. Got a lot to cover today. Dustin Hocken and myself, we're going to bring to you some information on the new tax changes, or at least the possibility of some tax changes. Got a big proposal in Washington, D.C., three and a half trillion dollars, 3.5 trillion dollars of new spending. This is enormous, huge, huge program that the House Democrats are voting on, trying to get this thing passed.

Dustin, who knows what it really means, because nothing's in law at this point, but the things that they're talking about, our clients need to know, listeners need to know. It's going to affect everybody from top to bottom. I don't care what income bracket you're in or what income range you're in, don't care what tax bracket you're in. If you're in America and this thing is passed, it's going to affect you.

Absolutely. And I think what it does as well, though, is it opens up planning opportunities, and it puts planning at the forefront of people's mind, because now it's more important than ever. So we'll get into a lot of these different changes, and one of them, the one that's well known, is the estate tax exemption being lowered, almost cut in half. And so now people that didn't think they really needed to focus on estate planning are really one of those people that really, really do. So we'll talk a lot about that, but it really just makes it much more important. Don't procrastinate.

Nothing has changed yet.

Well, so far nothing has changed. Most likely it'll be 2022, so we still have a couple months to make some moves, but it's really important to do it now. Like you said, Phil, I think it's going to affect everyone from top down. So that's one thing that sometimes is missed, is that, hey, we're only going to target the extremely wealthy, or the people who are making the top five to one percent in our economy. But when you actually peel back the layers and think about what those people do, those are our business owners, those are our C-level executives at corporations. And so when they have to pay more tax, their margins go down, so they have to increase prices on goods and services that we all buy.

Somebody's going to pay for it.

Yep.

Someone's going to pay for it. I think right now, people that have never planned, this might be a wake-up call, might be time to do a little bit of planning. Even if, in the last number of years, taxes have been relatively low. And so all of a sudden now, if this thing gets passed, corporate, personal, even if it doesn't affect you on your tax return, it's probably going to affect you at a spending level, at a lifestyle level. Because to your point, you start taxing business owners, they're going to push that through to the consumer. Cost of goods will go up, and now we've got inflation kicking in, we've got wage pressures coming in, so costa hires more.

There's a lot of reasons why people should be concerned about this possible change. I believe some part, maybe all of this, is going to be voted into place, and I think everybody needs to be concerned about it. At the very least, you need to get educated, and that's what this three-part series is all about. Dustin, it's episode one today. We're gonna talk through the basics, the overview of the plan, and then episode two and three, we'll touch on a lot of specifics. We'll go through what those specifics look like, how they might affect you, give some real life examples of what you can expect if this thing becomes lost. So huge plan, but great opportunity to do some good things within your framework, as it relates to your financial planning framework. So yeah.

Yeah. So to get started, one of the first changes is going to be the increased individual and corporate income tax rates. So long-term capital gains are going to be increased to 25 percent from 20, where they have been.

That was originally going to be a lot more than that, right?

Yeah, first. Yeah, so we were hearing that that was actually going to be the same capital gains rate as short-term capital gains rate, which is your ordinary income tax bracket.

So yeah, like 42.

Yeah, depending on how much money you make. So unfortunately they went from 20-25. So a lot of these, I wouldn't say any of them are really all that good, but certainly could be worse. Try to be positive about everything that's going on, but we were hearing a little bit more nightmare stories.

One of the things that we learned about, or we were hearing about, was this deemed realization. Thank the Lord that's not part of the plan. That to me was maybe one of the worst things I've ever heard, really. There's taxes, and then there's confiscatory tax, which is just completely unfair. It doesn't even make sense that you would say to someone, you've got some gains in your stock, but even though you haven't sold it, you haven't recognized the gains, and the stock can go up or down, so as volatile as a stock can be, forget all of that, let's go ahead and charge you the appreciation, let's go ahead and tax you on that, even though you haven't sold the stock.

This whole thing was just quixotic, all over the place, and I couldn't believe it. Fortunately it's not in here. Now, that doesn't mean it won't come up again, but right now it's not in here, which is good. But I think it's really interesting that we ended up with this capital gain thing at 25, even though it was looking like ordinary income. It then came down to around roughly 30 percent, so we were going to go from 20 to 30.

that's pretty big. Stopping it at 25 at least makes it a little more palatable. Still not necessarily what you want for long-term capital gains, but a heck of a lot better than ordinary income.

Yeah, absolutely. And so what you'll see is there's all these different levers that they're pulling in order to fund this three and a half trillion dollar spending bill. And so one of the other levers they're pulling is they're just going to increase the IRS funding. Shouldn't say just, they are going to increase IRS funding, and so this could be pretty impactful for a lot of people.

So essentially, here's the numbers: 80 billion dollars is going to be going to the IRS to improve taxpayer compliance. That's a lot of money. 90 larger budget than previously. And then 70, here's where it's important, 75 of that budget is going to be allocated to enforcement. So those are the people that are going to be...

What exactly does that mean, Dustin? What does it mean when 75 of all that money is going to be going towards enforcement? What is that?

So those are going to be all the audits. And so what we're probably going to see, what we will see, is more audits and more strenuous audits, and they're going to be peeling back more and more and more of the layers as they do some of these audits. And what they're actually expecting right now is it's going to increase revenue by 200 billion over a 10-year period.

That's over 10 years. So in other words, what you're saying is the IRS is going to be given a lot of money to hire a lot of people to bother the heck out of consumers, to come audit and look and be in your bank book at all times or on your tax return at all times.

I think in some ways that's necessary. There's lots and lots of times I think that the IRS should be a lot more forceful. They should be intervening and making sure that people are paying their fair share, no doubt about that. But to be adding all of these new people with this idea that your job is just to go audit, I think that pendulum will swing too far, and it usually does.

But I think as they hire these people, they're going to be gung-ho to go out and audit, and we'll probably see a lot of unnecessary audits, a lot of unnecessary problems that come out of that. Which in one way, one of those problems would just simply be wasting people's time, wasting efforts, and probably people that won't owe anything, they're going to end up having to spend a lot of time, a lot of money on CPAs and everyone else to help them through these audits. So I don't know, I'm certainly for everyone paying their taxes, but this one seems a little onerous and maybe unnecessary.

So the next lever that they're going to pull here is increased individual income tax rates. So the new highest individual tax rate is 39.6 for married filing jointly over 450 000 and 400 000 for single filers. But that's not just it, because now they're adding a three percent surtax on top of that, so now you're at 42.6. And then you increase the net investment income tax, and there is a reduction in the 199A deduction, which hurts a lot for business owners, because they were getting that 20 deduction right off the top and now they're not going to get that anymore.

That's huge for business owners. A lot of business owners, particularly S corps, small mom-and-pop businesses, which by the way makes up the lion's share of the businesses in America. So we're talking about the biggest part of business here. We're not talking about the Fortune 500s here, we're talking about the small, small mom-and-pop businesses, what America is made on. And so losing that, that's a big deal. That's going to change their tax return in a pretty big way immediately. Right off the top, that 20 percent is going to be adjusted, so that definitely doesn't help.

The surtax of 3, so that's going to change the game, particularly for S corporations, where you generally have an income or a salary and then the rest you typically take by way of distribution. So that's going to change a lot. But then you've also got this new thing for trust, where anything over around thirteen thousand dollars now is going to get hit with this new income tax. And well, that's a little different. Now that's gonna change the landscape for trust planning as well, which I know we're gonna talk about that a little more.

But there's some major, major problems here, not... and we haven't even mentioned these loopholes that President Biden wants to get rid of. I think those are pretty important. We talk about Roth IRAs all the time, and backdoor Roths and mega backdoor Roths. These things are, they might be on the chopping block here, huh?

Mm-hmm, absolutely. And so I think that brings up again another opportunity to plan, because as of right now, these backdoor Roth IRAs, or even a mega Roth conversion. So mega Roths, a little bit trickier, it just depends on what your 401k plan has. So if your 401k plan allows for after-tax contributions, and then the plan also allows for in-service distributions, what you can do is you can really pump about thirty thousand dollars into the after-tax side, and then you can roll it over into the Roth 401k side of your own plan. So now all of a sudden you're saving thirty thousand dollars a year that will never be taxed again, which is really, really powerful.

And to just keep in mind the Roth conversions, if you have an IRA, that may be an opportunity, maybe something to think about. And we're running the numbers really with everybody that we talk to right now, because we know taxes are going to go up, and right now we're probably at the lowest tax bracket we're going to be at for a while. And so if you can get that money out, pay tax on it today, keep in mind you'll have to pay tax on it today when you convert the money, but pay tax on it today in today's dollars, let that money grow forever, and most likely be at a higher tax bracket when you end up pulling it out, but you're pulling it out tax-free. Well, that can make all the sense in the world.

That is huge. When you think about being able to get money into an instrument or vessel that allows it now to grow without tax and distribute without tax, I think that by itself is powerful. But when you think about where we are in this country with debt, with three and a half trillion of new spending on the table, all of a sudden, if you don't believe taxes are going up, then I will say, with all due respect to every listener, you probably are not paying attention to what's really happening around you. Taxes cannot go down at this point.

And so when you look at the, just look at all of this spending, not to mention, Dustin, we haven't talked about the current debt in our country. So we already have 30 trillion of debt, and now we're going to add another three and a half with this new bill, and potentially another one to two trillion right behind that. That doesn't get talked about. So all of a sudden we could be at 35 trillion dollars. We can't pay back the 30 trillion that we owe, much less the rest of it. So the only way to make that even remotely something that can be paid back is we've got to raise taxes.

So I would say that this Roth conversion, the mega Roth, these things become extremely valuable now, because I think to your point, Dustin, I think we might be enjoying the lowest tax rates we've seen in a long time, and maybe the lowest that we'll see again. I don't know that we'll come back to these kind of rates. They're pretty... I like the rates right where they are, so.

Well, too bad.

Yup. I'm afraid I'm not gonna get to enjoy that much longer.

Right, right, that's what it is. The next change they're making, and we talked about it briefly before, but I think it brings up just some portfolio strategy conversation, but increasing capital gains rates from the 20 to 25 percent. You mentioned it before, we thought it was even closer to 30.

Yep, they actually peeled it back a little bit to the 25, which was good. We also thought that potentially it could be an ordinary income, which, after what we just saw, the 39, 39.6 plus the extra 5, could you imagine paying 43, 42 on capital gains there? That's a lot, and that's just federal, right? Then you got to think about if you live in a state that charges any kind of tax at the state level, you got more.

In North Carolina, where we live, they certainly charge that. We got another five percent there. And other states, now Florida, if you're fortunate enough to live there, or say Tennessee, places that don't have income tax, or maybe I think Nevada, and there's a few of them out there. But most states have state income tax, so you take 42.9, gosh, plus another five, you're at almost 50 percent.

No, I can't imagine that. That would just, I would probably just make me curl up and cry a little bit if I had to give away 50 cents on every dollar. That's a lot for long-term capital gains.

Yeah, exactly. Yeah, so it's one thing for earned income, but I think to your point, this really, really begins to illuminate things like harvesting of losses, trying to really be careful with your portfolio, making sure that if you're going to have turnover, it's in the right kind of account, so qualified versus non-qualified, understanding all of those things. We don't have time to get into that on the show, but those would be things that every person listening should ask: am I in the right kinds of accounts? Do I have my portfolio set up the right way to mitigate a lot of these risks that are likely coming January 1, 2022 if this thing is passed?

Rest assured, you better have your strategy in place. Probably a good time to check in on your advisor. If you don't work with us, that's fine. Whoever you work with, be sure that they have the functional competency to give you the right direction, that they're thinking about these things, that they've already got a plan laid out. Because if they don't, you don't want to be trying to fix this after the fact. You want to get ahead of this, have your plan built, and know that your plan is flexible enough that as this changes you can change with it and still take advantage of what is left in terms of opportunity.

Yep, absolutely. Excuse me. What I was going to say there was, I was actually going to ask you about the tax loss harvesting and then the turnover in the accounts, but that would be a really good series to talk about, just portfolio management from a high level. And what I would say too is share this video with your advisor. There's a lot of moving pieces with this new tax bill that's coming out, and there's a lot of information. We've spent hours and hours and hours digging through, doing research. Just make sure they're aware. It's going to be better for everyone. Even if you continue to work with them, that's fine, just as long as you're getting value from this, maybe they're getting value from this, and that's really what's important.

Well, we're putting this out there for that very reason. We want to educate people, whether it's our clients or anyone else. We just want people to know these things are serious. These are major things that are coming, and maybe the largest that we've ever seen in terms of the breadth of what this thing will do. This is going to cover a lot of things, and probably, as we said at the beginning of the show, it's going to hit everyone in some way. And so I think if you just take this information and share it with the people that you work with, or whoever that is that you trust and that you look to for financial decisions or to help you make them, share it. That's what it's for. We just want to educate people so that you make better decisions.

So one of the things too, Dustin, that when you talk about loss harvesting, that's not something that most people are familiar with, but I think a show on that would be great. But bottom line is there is a way to sell things that have a loss to offset things that have a gain, and that's going to be very important when it comes to these new capital gains rates. If you're going to pay more tax, you want to have every strategy working for you that can help reduce the effect of that tax.

So the next tax change is really one of the, I would say, most covered change. We've been hearing about it for a long time, and so this is the estate transfer tax exclusion. So it used to be 11.7 million per spouse. So I don't think that we've got that slide up yet, but as soon as it comes up you'll be able to see that it's showing us now. I think we went too far. So yep, there we go.

So we've got the 11.7 that you're talking about, man, that thing per spouse, per spouse. But it's getting ready to get the axe. If this thing passes, that's major. All of a sudden, if you weren't going to have estate tax, you might get concerned at this point.

Yep, right. So for everyone that doesn't know, essentially how it works is that if you have 11.7 million and one spouse passes away, then that essentially goes and gets added on to the other spouse's estate transfer tax. So now as a household you can actually transfer 23.4 million dollars before incurring any estate tax.

And there was no planning that had to be done for that. Years ago, I remember a time, Dustin, and this is probably telling on myself a little bit in terms of age here, there's a bit of an age gap here, but I remember the day when, if you didn't have what's called a credit shelter trust, meaning that the assets between husband and wife were split, and generally we'd split them down the middle, and he or she would put half of the assets in her trust and he'd put the other half in his trust, and they would get the maximum that they could pass per person. And back then, maybe that was six hundred thousand dollars, and then it went up to a million, and so on.

Today you don't need that planning. You don't need a credit shelter trust. You don't even have to ask for this credit. It's just given to you. It's assumed that you get the credit, which is pretty amazing. Well, now all of a sudden, with this thing being reduced, everyone's just used to this. If it gets reduced, you still don't need to do the planning to make sure that you get it, but you might need to do some planning to be sure that you don't go over, because this thing has, man, to cut it down from 23, 24 million down to 12.

That's starting to affect a lot of people.

Yeah, and this is one that will most likely go through, because if you look at it, they were already going to do it in 2026, right? So all they're doing is just speeding it up. So now it's going to be five million per spouse, probably adjusted for inflation, so closer to six, 6.2 million. So now if you think about it, if you're over 12.4 million as a household, you're going to pass, excuse me, anything down. Well, now all of a sudden you're paying 45 percent of state tax, 50 estate tax on everything above that dollar.

So could you imagine, let's say you're worth 20 million bucks. Well, now all of a sudden you have this 20 million dollars. First 12.4 is okay, but then now you've got this remainder, almost 8 million bucks, that's subject to 50 tax. You have someone's gonna have to pay four million dollars in tax, maybe selling something they don't want to sell, whatever they have to do, but they have to figure out how to pay the government back that estate tax.

It's huge. It could mean an estate having to be torn apart, maybe giving up family land or family assets that have been around for a long time. These things are nothing to, you don't want to play with these kinds of changes. You want to get serious. As we said at the beginning of the show, you got to wake up and recognize that these might have been planning discussions that you'd never have prior to this new potential change in the law. But today, with the changes that are occurring, all of a sudden, Dustin, we've got people that would not be affected, and now different ball game here.

So this thing may not pass, but I would tell you, if I was a betting man, I would be putting a lot on it does pass versus it does not. Will there be some changes? Will they make some adjustments? Probably. I expect it'll go through a few more iterations before it becomes law, but it could pass just like it is. Let's be honest, the Democrats have control. They can pass, they can do whatever they want, they can force this thing through.

And in some ways I can see how it would benefit us, because it might get some of the tax base that we really need. On the other hand, I think it is a very, very poorly written bill that takes in a lot of revenue that probably could be generated a different way. Some of these things are going to be very, very painful. But to your point, it's perfect opportunity for planning, and if people will just simply take advantage of that and recognize that, hey, everything, no matter what it is, there's always a way to plan for it. May not be as easy today, and I think there's going to be a lot of challenges with planning, but there's still opportunities to plan. So please, whatever you do, don't simply ignore this and act like if you ignore it'll be okay. Not the case here. This thing's going to be pretty widespread in terms of who it affects and how it affects them.

Yep, absolutely. So to go to your point, there are some estate planning techniques that you can use to help. I don't want to go into too much detail on really any of these, but just high level, these are gonna be part of our next shows, right?

Yeah, we'll be getting into this later. But charitable remainder trust, let's give everybody just a little something here to get their taste buds excited here, right? Ready for the next. Make sure you tune in next week.

So charitable remainder trust, qualified charitable donations, gifting within the family, irrevocable trust and insurance planning are all really, really good techniques to ease some of this, and really things you want to be thinking about now. Because what we see here is most of these provisions and the effective dates, most of them are in our sets, and who knows what happens, but they're said to become effective in 2022. So although some of them might become effective September, right?

So the way it's written, there's a couple of these things that could actually be retroactive. They might not pass it until, say, the 11th hour of December 31st, but then they back up, and some of these things retroactively, boy, that could be painful. But for the most part, I think January 1 2022 is when the majority anyway takes hold and becomes law. But it doesn't give you very much time to plan, so I'd say that's planning is of the, our timing is of the essence here. We've got to get started. Don't delay it, for sure.

But I just wanted to say one thing about all these techniques that you just mentioned. So irrevocable trust, gifting within the family, qualified charitable donations or QCDs, charitable remainder trust, insurance planning, those are a great thing. We're going to talk about more than that. I know we've got others on the list. We're going to talk about GRATs and things of that nature.

But what's really interesting, a lot of these techniques that you're talking about, Dustin, these are grantor style trusts are grantor style transfers, and man, those are on the chopping block in a huge way. I'm really, really bummed about how much, people have done estate planning with these techniques for decades, and a lot of these things are going to be turned on their head. Everything that I'm reading, everything that you've been reading, these techniques are going to require some changes without a doubt. I don't care how good your things are written, if you've got some of these tools or techniques in place, might need some adjustment.

Yeah, episode three actually of this bill is just all on the GRATs, and so the grantor remainder annuity trust. So there's a lot of information there, and like Phil said, we've been planning with it for a long time, and so we'll be going into a lot of detail there.

Show three will be interesting. I can't wait to do that show. Show two will be great as well. We're gonna bring a lot more next week, so we'll be carrying forward this same theme, and we're looking forward to sharing that with you. So hopefully you've learned a lot today. There's so much to this, and this is just the overview. We just hit the broad strokes today. There's so much in this tax bill. This thing is hundreds and hundreds of pages. I sometimes wonder if Washington even knows what's in it.

But what I can tell you is what we're reading and what the folks that we talk to and people that we work with, centers of influence or alliances that we work with, people that we know and like and trust, they're reading the same things that we're reading. And man, there's a lot of stuff here that can really, really harm what you thought was a great plan. And so not that your planning's in vain, but it probably needs a little bit of an overhaul, some adjusting.

But I hope everyone's learned something today. Dustin, I certainly enjoy bringing this, I know you do. If there's questions that our listeners have, please reach out to us, our website omnistarfinancial.com. Check out our YouTube channel, subscribe, don't miss an episode. We've got new things coming out all the time. We'll be doing this show over the next couple of weeks, adding more and more to what we talked about today, and hopefully our listeners can take away at least something that will help them make their financial planning a little more solid and secure and take a little bit better care of their family.

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