Biden's Spending Plan and the Changes that Didn't Happen

Hey everyone, welcome to We're Talking Money. Time for a little follow-up here. We're gonna get into the details in just a minute. I'm Phil Clark.

I'm Dustin Hocken, wealth advisor here at the firm.

Hey, great to have you. Today we're looking forward to sharing some information with you about the changes out of Washington, D.C. Everyone's been hearing about all these plans from President Joe Biden. We're going to bring you the latest, tell you what's happening, tell you what's not happening, hopefully give you some information that'll help you make better decisions.

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Welcome back, everyone. We're looking forward to sharing some very important information with you. A lot of things have changed since the beginning of the year when President Joe Biden was sworn into office. Make no mistake, he came out of the gates firing, lots of orders by way of a signature. A lot of changes have been made, and of course everyone was hearing about the Build Back Better Act or the Build Back Better plan. But I'm not really sure that that makes a lot of sense, because President Biden and company are moving forward with these incredible bills, these incredible amounts of money. We're talking trillions of dollars here, yet the tax base that we were expecting to change, that was going to grow the tax base, a lot of that's not going to change now, Dustin. So some really interesting things.

First and foremost, let's talk about what did get passed. November 5th they did pass about 1.2 trillion dollars of what we call, or what they call, infrastructure spending. Now, did we need that? I don't know. I think you can have a healthy debate over that, but if you drive down the roads, I think all of us would agree that we need some road work here and there. We need some infrastructure repair. Question is, what is infrastructure? What do they really mean by that? That's another show, we can't debate that today. But what I can tell you is they got 1.2 trillion passed. That is done.

So everyone's saying, well, what's the big deal? Well, now it's round two. So now they're going to go for 1.75, 1.85, who knows what the final amount will be, Dustin. But they were trying to get that done by Thanksgiving. All the skirmishes that are going on in Washington right now probably means that's not going to happen, but I don't think they're going to go home and forget about it. I think this gets it, it gets pushed through at some point. Still ends up being and 3 half trillion dollars, Dustin. So I can't help but hear these, I can't help but have these memories of President Biden on every news channel in the world saying it's not going to cost anything. I don't understand that, Dustin. Maybe you helped me figure it out.

But let's start with what we know now, as in this final bill that they're trying to get passed by Thanksgiving, probably not going to happen, but let's talk about that, starting with a surtax for the top earners. They've totally changed that. Was going to be any one of around 400 000 or more. Dustin, talk about that one.

Yeah, so this, the new, I should say the next bill or this bill that's been passed, it does, it's not quite as scary as the first three episodes as we were digging into everything. So thankfully for that, they've brought it back from the three and a half to one point seven five trillion. Still a very big number, like Phil said, but it's not going to affect quite as many people. There will still be the trickle down from the CEO, core CEO level executives, all the way to business owners. So still be some trickle down, but it's not going to affect everybody directly like we originally thought it was going to.

So this surtax on essentially the top earners, what it's going to look like is the highest tax bracket is still the 37 percent, so that's not changing. But there's now going to be another 5 percent surtax on anyone who makes over 10 million dollars a year for all individuals, except those married filing separately, that's going to be at 5 million. And then there's another additional 3 percent tax on anyone earning over 25 million. So it's only going to direct the impact the wealthiest of the wealthy, the 0.02 of all Americans. So fortunately, the unfortunately there will be some trickle down, fortunately it's not going to affect quite as many people.

The other piece that's changing is there's going to be a higher corporate tax rate. And so the top federal tax rate is still going to be at 21, but large companies now face a minimum 15 rate. So that's really, really powerful. You hear about how all these really large corporations like Amazon, all these companies are not paying a lot of tax. Well, now if you have a minimum rate of 15, those companies that are making billions and billions of dollars, 15 on those very large numbers is a very large amount.

Yeah, and actually that's where they throw this new corporate tax rate in. It's for any company with profits over a billion dollars, here comes 15 percent, and that's a minimum, so essentially no way around it. So they're going to hit the highest earning, the highest earning people, and then they're going to get the corporate a little bit. Not nearly as onerous as what we were talking about a few months ago, but this is going to frustrate a lot of people, there's no doubt about it.

And additionally, the bill would impose a one percent surcharge on stock buybacks by large corporations. Folks, you've heard of that. In the last 12 to 18 months during COVID, every publicly traded company that you'd even think about was engaged in buybacks. So all of a sudden now they're saying, okay, if you buy back or you do buybacks, you're going to pay a one percent surtax. So they're coming in at a slightly different angle on some of these things. Not nearly as onerous, but certainly, certainly this tells you that any kind of trillion dollars worth of spending, multi-trillion, is not free, and this is just the beginning. There's no way that this will pay for 345 trillion in spending. The math doesn't work. So we'll see what's next.

What about this international tax overhaul? That's a pretty big deal. Dustin, tell us about that.

So this has been something that's been debated for a number of years, and essentially what it's going to look like here, the goal, I should say, is to not allow companies to sidestep the U.S. taxes because they're international companies. And they essentially can just say, hey, we're international, and they're essentially just using that because they're paying less taxes over there, so they're essentially hiding tax from the U.S. And so what essentially it's going to do is create a minimum tax for certain international companies that are operating in the U.S. So what in turn this could potentially do, and it's a little confusing to me, you'll probably be able to explain a little better, but so this new tax on international companies that are over in the U.S., this is going to force companies that are in the U.S. international to come back here.

So there's something called repatriating currency, and basically what they're saying is you can make all the money you want in a foreign territory, but you're gonna have to account for those dollars at a certain level on the U.S. soil. So in other words, you've got to pay tax on it. You can't just hide it over there, pay the lower tax, but expect it to make you wealthier. You're going to have to pay your tax because you're domiciled here. So they're going to get you.

And I'm not so sure that I hate that tax. I think that's been used in a lot of ways, and maybe some ways that probably maybe they need to ring the bell on them just a little bit. But I'm not for increasing taxes, period, so it still bothers me a little bit. But yes, they're absolutely going to create basically a way to say to these companies that are trying to operate at a lower level of tax in foreign territory: you can bring it back, you got to pay some tax on it. If you want that money, you got to pay a little tax on it.

So what about this wash sale rule? We were talking about that in one of the last shows, and the wash sale rule was across the board, it was going to be a big deal. Well, now all of a sudden all of that language is removed. Starting in 2022, it's only for crypto, is that what I'm hearing?

Yeah, so now it's going to be, it currently applies to stocks, bonds, other securities, and now they're saying it's, that could potentially be applying to the crypto, so Bitcoin, Ethereum. And what a wash sale is, just in case you don't know, it's if the stock has a drawback, you sell that stock so you can realize that loss, and then you in turn immediately or within 30 days buy the same stock or same type of stock back. So you have the loss, and then you buy it low, let it appreciate, you still get to keep the loss.

Okay, so it doesn't change the old rules, but they're adding crypto. Crypto wasn't part of it in the last one before, now it is. Okay, so now they're coming after crypto, which tells you they must believe that's going to be around for a while. Not to mention they're seeing a tremendous amount of trading in that, lots of leverage being used there, lots of arbitrage. I guess they're going to come in and clean up on that. All right, so watch out, for you folks out there trading crypto, wash sale rules go into effect if this is passed, January 1 2022.

And I think that's fair. More and more people are getting into it. Sure, it's pretty much its own asset class now. It's starting to get put in some of those different asset classes, so I think it's fair to do that. So just make sure that if you do have cryptos and you're doing things like this, make sure you know that this is going to be in there.

You make a good point, Dustin. As long as it's trading like an equity, as long as people are trading it that way, a lot, I mean tremendous profit opportunity in just the last eight months. We've seen this thing go from 24 25 000 to what was it trading at today, maybe 63.

crazy stuff. So incredible volatility, tremendous opportunity to make a lot or lose a lot. You can play on both sides of this thing. It doesn't take prisoners, it'll take you up or down. So, but again, if you're out there trading crypto, be careful of those wash sale rules. Very, very concerned, very, very cautious about those things in general. Just watch that on your tax return.

What about this large trust in estates? Boy, that changed a lot. We had, that was certainly more recognizable as a much more restrictive component to the bill. Looks like they've maybe, have they lightened that just a little bit?

Absolutely. So they're still going to be hit a little bit, but not nearly as hard. Where we're talking about every single type of trust was going to be affected and everything else.

So yeah, and anything over 12 or 13 000, it was pretty, it was hard hitting, bullseye really, and lots of estate planning was going to be turned on its head. So I'm very relieved to see this. I think this means a lot to a lot of people, probably preserves a lot of estates at this point anyway.

Yeah, so new tax on money taken from trusts or estates. That's a five percent tax on anything in excess of two hundred thousand dollars, so much higher than that twelve thousand dollar number. And then there's also another additional three percent on anything over five hundred thousand. So just be aware of this if you inherit a large IRA from a non-spouse. The rule right now is you have ten years to pull that money out. So if you have five million dollar IRA, well now all of a sudden you're pulling out about five hundred thousand dollars per year. You're going to be up over and you're going to be getting hit with both those taxes. So just be aware that that's there.

One that they are keeping as well is the new tax, or the child tax credit. We'll talk about that a little bit.

Yeah, I think that was pretty simple. We said in one of the shows that not really a big deal for really high earners, wasn't going to make a huge difference. But if you were 75 000 or less on income and 150 000 for joint married couples, then you get this tax credit that is basically three thousand dollars, but now with an additional 600 for children under the age of six. So you get this tax credit, it's a benefit. People that are staying at home trying to help someone, take care of someone that needs some daily assistance, it can be a family member, it doesn't have to be a skilled caregiver kind of thing. So you do get this tax credit, and a tax credit, as we all know, that is a dollar for dollar offset to tax. So if you get a three thousand dollar credit, that's three thousand dollars literally of money going in your pocket, because you just wiped out 3 000 of tax. Not a deduction here, a credit. So it's pretty valuable for sure. Certainly better than nothing. Rather have it than not have it.

Absolutely. I bet no one will turn it down.

Yeah, it's pretty darn, if they fit the category here, that criteria, they're going to take it for sure, and rightfully so. It's in the bill, you should.

So the last one that's still in the bill is for an 80 billion dollar increase in funding for the IRS. So essentially this is what we talked about in an episode, I think it was one or two. But what we looked at there was with this increased funding, now they're going to be more efficiently able to essentially enforce the current tax laws. So more audits, they're going to be able to go through tax returns a little bit closer, making sure they're not missing anything. And what it's saying is the IRS could raise roughly 200 billion dollars in new revenue. So that means that if you're stretching on your taxes a little bit, may not be the time to do it right now.

Though, Dustin, the one concern that I have about this incredible, incredible, I call it profligate spending, this is just throwing money at all kinds of things for me. It's one man's opinion, but to take 80 billion dollars and just hire a lot of people at the IRS, can you imagine the calls to

So, but for now, these are not in the latest version of this bill that, who knows when they're going to get it passed, if they get it passed, but these things are not in there. So retirement plans, this is your wheelhouse. Take us through what we should know there.

Yeah, so they originally had a lot of different things with a lot of different retirement plans that they're putting in there. One being no more backdoor Roth IRAs, no more Roth conversions, or limits on Roth conversions, I should say.

That was a gut punch to you, huh? You love those Roth conversions.

And boy are they valuable. So powerful.

I know you were not too thrilled about that being removed potentially.

No, but happy that's not in there now. So there was limits on traditional IRA contributions. They're going to change that. Changes to the required minimum distributions for high income earners. They're going to start forcing you to pull out of that IRA and the 401k for high income earners.

That would have been a big, big problem, forcing you to take more and bump up your tax bracket.

Yeah. So as of now they've been scrapped. Right now, just like what Phil said, who knows what will happen in the future. So just keep an eye on it and we'll keep you posted with any updates as they come available.

Yeah, absolutely. Real quick, the capital gains tax, no change, stays at 20 percent. In the last bill, the last version, they were going to take that originally up to 30 percent, then we heard 28, then it was 25. As of this show it's 20, right where it is, no change. So that's good news.

The estate tax, no changes on that. No changes there. So right now it's 11.7 million estate tax exemption per person, per person, so it's 23.4 million total. They were going to push it back down to five per person or 10 total, which would have been a little bit of a make your heart pump a little bit. But so they're not doing that, that's not in there. So no changes on that for now. And I'll let you wrap up and take us home.

Well, I think that estate tax thing is big, man. That could have been major. We saw people rushing to their attorney's doors, to our doors, trying to get things done by year end, and we were trying to pump the brakes and get our clients to realize, hey, wait a minute, let's see how this plays out. Fortunately everybody didn't undo what they had. But again, we'll keep you posted. This thing, who knows, it may come up again.

So things that might return on this bill. Listen, make no mistake, we've got a lot of things that could come back. One in particular that you might be hearing about in your news right now is your state and local taxes, also known as SALT tax. You hear everybody with that cool acronym. We've got so many acronyms in this world, but SALT.

And so here's something that's really interesting, Dustin. The Democrats want to put a, there's a cap on SALT tax today. You can deduct or remove from your federal tax bill an amount equal to what you pay in SALT tax, not to exceed ten thousand dollars. But the Democrats are talking about removing that cap and it being unlimited. Now, I may not be the sharpest knife in the drawer, Dustin, but if we take the SALT tax away, or rather the cap, and now I can deduct unlimited amounts, isn't that taking the federal tax down? So if we've got three, four, five trillion dollars of new spending, but now we're going to give people an unlimited SALT deduction or offset, I feel like that's taking money away from the federal government. It seems to be the antithesis of what we were trying to accomplish. So again, I don't know what they're thinking. I'm just telling you what we know.

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Sounds great. Take care, everybody.

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