Capitalist Investor

The Repercussions of Biden's Tax Plan, Ep. 249

• Strategic Wealth Partners • Episode 249

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In this insightful episode of Capitalist Investor, hosts Luke, Tony, and Derek dive deep into "The Repercussions of Biden's Tax Plan." They discuss the anticipated changes to federal income tax rates, capital gains tax, corporate taxes, and other key aspects of the proposed tax legislation. The trio breaks down how these changes could significantly impact both the upper middle class and small business owners, drawing historical context and comparing the proposed taxes to historical rates. They also provide actionable strategies to mitigate tax burdens, such as Roth IRA contributions and real estate investments in opportunity zones. Don't miss this episode if you want to stay informed and prepared for potential tax changes. 

Hello and welcome to this week's episode of the Capitalist Investor. As always, you have the dream team here. Tony the tiger. Cool hands Luke. Cool hand Luke. Excuse me. And myself, Derek Gabrielson. How we doing, guys? Between cutting grass and, like, being stupid, maybe I will be cool. Like I should be cool hand Luke. Like, I've almost cut off my hand, I think, multiple times with the tractor. You know, I remember getting off one time and the blades were still turning, and I like putting my hand dumbly in there. You never know in today's world. All right, man, here's a, here's some words of wisdom. Stay in your lane. And what I mean by that, I've always said it, you know, if the electrical box burns out or something in my house, like, guess what I'm not going to do? I'm not going to go down there and try and figure it out. If something starts springing a leak in my basement, I'm going to go shut off the valve and I'm going to call plumber. I'm not going to grab a wrench and try and fix it my own. I've got a house to sell, Tony. I'm trying to keep it cheap. Hey, man, if anyone listens podcast, West Lake, Ohio, there's another thing. I am not cutting my own grass because a, you know, based on my, my work, my, my professional workload and my personal, I just, it's worth $40 to me a week to pay somebody else. Yeah. And I'm not gonna cut my hand off. Irreversible. It's an irreversible mistake. Exactly. Exactly. Good point. I'm learning a lot from you, Tony. Speaking about irreversible financial mistakes. Let's talk about the Biden tax plan. I like that transition. I like that. Well, apparently there's no good, they're not gonna be any private markets anymore. There's not gonna be any invest mean and investing anymore because one of the biggest things he wants to do is raise cap gains to, like, 50% for the top brackets. So there's no point you're investing or trying anymore, guys. Yeah, give up our jobs. So let's start, let's start from the chopper. The top here. So he wants, so one of the ideas is to raise the top federal ordinary income from 37 to 39.6. It's very similar to what Obama's was, and that's for people making over 400 grand. Now, I think how Biden would pitch this and how I think he is, he's like, these are taxes for the rich. They need to pay their equal share. 400 grand isn't rich. I need to break it to them in a lot of areas. It's, you know, like, I mean, what, what is it? What's the statistic? Like, you need at least make a hundred grand to, like, be just for. Just a Ford 120 to afford a. Like, what we figured, like, house, shelter, car, gas, food. Like, hundred grand is kind of like what you need to actually just not be sweating every day. Right. So, yeah, 400 grand really isn't. I mean, it isn't. It's very middle class. So there's that. Then he wants to jack up the cap rate, the capital gains rate. So that's on, that's, that's capital gains on, like, your house. If your house appreciates, if you have a non qualified account, you've maxed out your traditional, you know, saving buckets, like iras, 401 ks, things like that. The money that's saved in non qualified assets right now,

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15 or 20%. What President Biden wants to do is raise anyone making over a million dollars. He wants to take that 20 to 40, essentially. And then you strap on, like, affordable Care act and stuff. It could be close to 50, which is bananas. He wants to increase Medicare tax through payroll, right, from 3.8% to 5% for people making over 400 grand. So he's got a, he's got a target out there, right? And it's. It's upper middle class and above. And he wants to repeal 1031 exchange. What is that? That's essentially long term cap gains inside of real estate. There's ways to transfer that to new properties and probably a whole different show for somebody in that expertise, but that's essentially what it is. It's transferring not, you know, large cap gains in real estate from one, one purchase to another. Carried interest. Hang on. Sorry. He wants to repair all that. There's special funds out there that have cap gains in certain investment interest, like interest that it's paying. You should be paying ordinary income tax on interest. And there's some investments out there where you pay cap gains. He wants to eliminate that. Then he wants to have the billionaire tax. So it's basically, you can think of it, is it a wealth tax? Because it's definitely not adding to a traditional tax bracket, but essentially making sure if you are a billionaire that you're paying at least 25% tax. But if you really read it, it could be affecting anyone that is, has a net worth of over $100 million. That is not a billionaire. That's far from it. It's 90% less. So if you have a hundred million dollar net worth now, you're paying a flat 25. Now that is where we have this complicated tax law laws. It's thousands and tens of thousands of sheets of paper to do all this. That's why cpas make a ton of money. Because when you have a lot of money, you can do a lot of things. And when you can do a lot of things, you can complicate it very quickly. And that is why they're, that's why a billionaire might only pay 10% because he's taking advantage of the current tax laws. Blowing that up could just be an economic disaster. Let me throw some history on you. Can't wait. 1860S income tax comes out for the first time to pay for repercussions of the civil war. Comes out a rate of 1%, 2% at the high rate. All right, now we're talking about 40% upwards of the high rate corporate taxes. I believe it was the early 19 hundreds. It was like 1908 or 1909. Corporate taxes came out for the first time. I think it was actually 1913. Came out for the first time at a rate of 1%. Now we're talking about corporate taxes. You mentioned that corporate taxes rising from 21% to 28%. So now we're talking about 28% on corporations. And I don't think Biden realizes that small business owners pay corporate taxes. They're as structured as any LLC or s Corp, C Corp, whatever it be. And many small business owners make 100, 200, 300 grand a year. Now they're hurting. So it's not going after just 400 grand or above. Also, if you go back to just four years ago, he was talking about the $400,000 limit four years ago when he came into office. $300,000.04 years ago is probably$400,000 of income today, adjusted for inflation. That number hasn't changed. But many more Americans are now making close to that number that were probably making 300,000 household combined. And that's just two jobs making 150 grand a year. And like in Ohio, that's good income. But you look at New York, you look at California, look at maybe the Texas, Florida's of the world that are a little higher, higher cost of living areas. You know, 3400 grand does not go very far. Again, it's very middle class. But it's very interesting. I think in Cleveland, I think in Cleveland, Ohio, that's a, it is a, it's a lot of money in Cleveland. You go to California. That is not a lot of money. No, no. You got to make that to afford the basic necessities. When you're buying a million and a half dollar house, that's the very average home. But it's interesting, historically, how much taxes have risen and how, okay, we have been with it because we have lived only through it. Like, we've only lived through this time. We're used to it. But you go back hundreds and hundreds of years, the people back then would have been so frustrated and so disappointed with where America is headed in today's world. It's very interesting. Ray Dalio, his newest book, I love principles of changing world order. You know, most people can't identify big changes in their lives because everything goes in cycles, usually about 70 or 80 years. Good times last about 70 or 80 years. Bad times last about 70 or 80 years. So the big transitions in someone's life only happen once in their lifetime. In regards to big tax changes, like, I'm talking major tax changes or major changes in monetary system around the world, it just, it's interesting how, okay, we're with it and we're talking about, you know, these high percentages. Whether it's changing five or 10%, they're all very high. It's just, it's just wild to me, honestly, the, the political debates, you know, that go on out there, but I don't know how, based on our current system right now, that any, under any circumstances, you could say, hey, it's a good idea to raise our taxes to give more money to the government. Like, how could you ever, how could you ever possibly think that that was going to be a good idea? Because they're going to take that money and whatever project they're doing, they're going to waste it. It's not going to just give it away. Whatever worked. Exactly. Or give it away for stuff that the majority of the people don't want to see. Yeah, I saw somebody, a meme on Facebook, and they're like, essentially, if you earn it, spend it, save it, invest it, build it, sell it, live in it, drive it, eat it, give it away or die. You pay taxes on all of those. Every single thing. I just think about everything I just said. I did it very fast. But everything, everything you do is as. A tax associated, what we ran from, we fought a revolutionary war over a t tax. I think it was a one or 2% taxation. Taxation without representation. Is that. Was that how essential? Yes, but, like, we are worse off than what we ran from, from Great Britain in the 1770s. But, yeah, if you live in California, if you live in, like, La county or you live in, like, Manhattan, and you're making more than$250,000 as an individual, you're probably giving half of your salary to taxes. Just on the income and property tax. Side, income, state tax, sales tax, like city tax. You gotta. I think it costs, like, something ridiculous, like 8% or something, to live in Manhattan, like an additional, like, local tax. But it's just like, it is wild. You know, like, the rents at least two, if not three, x. I know somebody paying $10,000 for an apartment. Can you imagine the house you could have for a $10,000 mortgage payment? So this is the thing. You're buying a two bedroom apartment. And one of the biggest, and one of the topics we just talked about a couple episodes ago was distribution and accumulation phase. And this is why, if you don't come from money, if you're working your way up in the ranks, it is so hard to accumulate anything nowadays because taxes are one of the biggest hindrances to wealth creation. Wealth accumulation, 100%. So just think about this, though. This is, this is what, this is the wild part. So at the end of 2025, January 1 of 26, we're all gonna, we're going to have a new tax law. So whether Trump wins, he'll probably modify what he currently has in place, is what I would guess. He'll make some changes. I'm sure if Biden wins, he is going to try and do a lot of the things we just talked about, and there's a good chance that most of that will get shot down with the checks and balances. And what happens next is that when there's a stalemate, it reverts back to the Obama tax rules. And if that happens, our. So it gets a lot more complicated. Again, Trump actually made things less complicated. He raised the standard deduction. So, like, virtually nobody can itemize anything. Well, that's cut in half. So now we come back to possible itemization. You're gonna bring back salt tax. So, like state and local tax, you're gonna be able to amortize your mortgage interest, and all this stuff is gonna be coming back, which is. You talk about complications. Holy cow. And the brackets are going to change. The marginal brackets will change. The ten will go to twelve, and the twelve will go to 15, and the 22 will go back to 25. So essentially, what's going to happen is you're going to be paying 15% to 20% more in tax on top of your deduction being cut in half. And the child, the child tax credit that's going to get cut like every. You're going to be paying more in taxes in about one and a half years. Especially retirees. Yeah, especially retirees because your marginal bracket's. Going to go up and most of the money's in qualified assets, like whether directly. Whether directly or indirectly, higher tax rates only help the rich and keeps the poor middle class. Exactly. Actually disincentivizes mobile social mobility within the social economic status, which is why everyone, even middle class America, feels poor right now. Yeah. So what? So all right, what are, what are some solutions? Rather than us just sitting here bitching about it? What can we offer? What can we offer as a Biden. Administration has not called me. Solution is we call up our representatives and start complaining and we fight against this big government. But how about some actual, actual action, actual action items that you can actually do regardless of who wins or loses. So you want to use the tax code to your advantage. Anyone can try to get fancy. That usually comes with having some assets in different areas, whether it's Roth IRAs, traditional iras, or whether it's taxable. I know for us, we've been looking at things like opportunity zones for real estate. To utilize real estate for those tax deductions, you don't have to be multimillionaire, maybe minimums of $100,000 support of that for higher income earners or for a big Roth conversion that you do things like that to get around it. Right. So opportunity zones, charitable contribution funds, if you're over 70 years old, those kind of tax strategies are things we take a look at. Yeah. I mean, all right, so if you're all, if you're saving all in traditional, I mean, you could start mixing in some Roth contributions. That's one thing. Depending on where you are on an income level, you could or should be considering Roth conversions before taxes actually do go up. They are on a discount right now. So those are some things that you, those are some real things you could or should be thinking about. Can you think of any, even potentially life insurance and some certain circumstances can kind of work like a tax free income source later in life? Yeah. So that's a little bit more complicated strategy, but we've all seen it work here pretty well in the right. In the right spot. Yep. So there are some actionable items now, but make sure you vote. I'm concerned, though, like down the road, Roth IRAs will be taxed. I think they will again change the rules of the game. I think I mentioned that in a previous episode I think they will change eventually as they don't get, as they find out higher taxes actually doesn't drive higher tax revenue actually disincentivizes investments, disincentivizes economic growth, and tax revenue actually goes down with higher taxes. They're gonna be like, okay, well, we're gonna find another way to try to get more tax taxes somewhere else. And they're gonna cute with it and they're gonna tax our Roth IRAs and stuff. Well, maybe not next couple decades, but. Maybe if history plays out the way it has. That's why we always tell people, if you don't have a Roth IRA, open one and fund it. Put money in it, get the clock started, just have it open. Right. Because typically what the government has done with any kind of changes in the, in the past for any type of tax rules or whatever, they usually grandfather you in. If you a, if you have a Roth Ira open, blah, blah, blah, like, yeah, you know, and then maybe the Roth Ira, like, they could change it. Like, hey, any, yeah, we, you know, the money that, you know, the basis that you put in, we won't tax you because it's after tax, but any of the gains. Yeah, we are, we have a special tax for that. There could happen. But they'll usually grandfather people in who have them open and funded. It's great. They've done, they've done that in the past. Yep. Can they change? They, can they not follow that suit? Sure. But, but that's why, another tip, just open a Roth Ira and fund it. Just put money in it. You don't even need to invest it. Just money needs to be in the wrapper, in the account. It's a great point. It's interesting how the rules of the game can change if you're the, no longer the referee in the game. You're actually a, you know, player and the referee in the game, which is what the government has become. It's very interesting. All right, well, make sure you get out and vote in November. And thanks for listening this week. If you guys have any questions, comments, ideas for us, send us an email to info Connect.com and we'll talk to you soon. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.