Before the COVID 19 crises the Federal Budget deficit for 2020 was forecast to be $1.1T, so far $2T of stimulus has been approved with more to come. This has lead to the Federal Debt to explode to $25T with more to come… GDP is around $21T so we are easily over 100% Debt/GDP ratio.
This set of data has led many clients to ask how this will be paid for and will it lead to inflation.
I’ll tackle inflation in a future post, but how do we pay for this debt. I see two ways out – a debt jubilee(unlikely) or increased taxes at some point in the future.
If there is a change in the Senate or the Whitehouse in November then this could definitely lead to increased taxes.
Taxes are applied in three main ways: income, capital gains and estate taxes.
Income – taxed at 37% for married filing joint over $622k (Don’t forget CA + 12.3)
Capital Gains – taxed at 20%.
Estate Tax – 40% on estates over $11.58m.
also there is the Net Investment Income Tax 3.8% on investment income (dividends, cap. gains and interest, when income is >$200k).
As you can see tax rates are high and could be going higher.
So what do we do now?
Plan – what planning can we do to help mitigate the impact of taxes,
Accelerate – can we accelerate gains/income into this year if we think tax rates are going to be higher next year,
Freeze – With Unified Credit at $11.58m we are encouraging clients to look at various gifting strategies to move assets outside their estates today, thus freezing the value of their lifetime gifts.
The next 6 months are going to be noisy so we are trying to act thoughtfully around the noise.
Bye for Now.