The Autumn season has always been a time for reflection. We begin taking stock of what's been accomplished so far in the year and also gain a sense of urgency to finish the remaining things on the to-do list. It's also often the last push for financial planning before everyone checks out for the year to enjoy much needed time together with family and friends for the holidays. The biggest thing I'm hearing on people's minds this year is taxes.

    

We don't yet have certainty on proposed legislation covering both income, capital gains and estate tax at the time I write this. However, what does appear likely is the effective tax rate paid by households with income between $400,000 - $1,000,000 is going to increase. It's important to remember the difference between your marginal tax rate and your effective rate. The marginal tax rate is the highest tax rate you reach based on your total taxable income. Your effective tax rate is the average rate you pay when you combine the various rates paid as your income increases through the brackets. This difference exists because of the progressive nature of the US tax code which divides your income into groups and taxes each group at a different rate that increases as your income rises. 

 

The expected increase in effective rate for those earning between $400k - $1M is due to a proposed compressing of the existing brackets so that more people will reach the higher brackets faster. This will allow the Biden Administration to tax more income at the higher existing marginal rates while still being able to claim they didn't raise taxes except on the "ultra wealthy". There's little political risk if you can claim you're not raising income taxes other than putting the highest rate back to 39.6% as it was before President Trump took office. That, ladies & gentlemen, is how you raise taxes without raising taxes.

 

With this in mind, it is likely (although not certain) that accelerating income in 2021 wherever possible will prove a prudent strategy. This may include approaching your employer to ask if bonuses owed can be paid in the 2021 calendar year, exercising stock options or completing Roth IRA conversions prior to the year's end. **This is not blanket advice though and each situation needs to be considered in context so please talk to me or consult with your tax professional well in advance of implementing any strategy.**

 

I will continue to monitor the situation and keep you updated on developments and potential strategy changes to consider. In the meantime, I've curated a series of insights & articles from thought leaders I believe will be helpful to your family this month. There's also a new inclusion of something from the old snail mail newsletters I used to send called In The House of Broughton for those who want to keep up with what's happening with my family.