Are You Ready for the Coming Tax Changes?


The following is a transcript of Episode #42 of the Retire Happy podcast with Roger Gainer.

All episodes of the podcast can be found at Apple PodcastsGoogle Podcast, and Spotify.

Roger: We know the shift is coming. That’s a given. How it’s going to look we’re not exactly sure, but we can make some pretty educated guesses based on both the political climate and economic realities of the infrastructure bill that, in one way or another, it’s coming.

Clark: You’re listening to “Retire Happy” with Roger Gainer, president of Gainer Financial & Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. With so much uncertainty in the world today, it’s more difficult than ever to make decisions that can help you progress toward your financial goals. So, in this episode, Roger and I discuss some of the potential tax increases currently being discussed in Congress. Roger also explains how individuals can take action now to minimize their tax burdens in the future. He also shares some helpful resources that will help you with navigating that process. There’s a lot to cover, so let’s dive right in. And don’t forget to head on over to for more content like this. Enjoy the show.

Roger: How are you doing?

Roger: I’m doing well, doing well.

Clark: We’ve gotta continue our conversation today all about taxes. And I know this is, of course, relevant any time of the year, but there are a few specific things we’re gonna be talking about today, as it relates to what’s being considered right now with tax changes. As I understand, as I’ve heard you say before, there’s not been many changes in quite a while. So, if we’re going to see some changes, there are some things we need to be paying attention to. Is that right?

Roger: Well, there’s always tax changes, but some of these tax changes that are being considered right now are pretty extreme. They’re talking about the first really major tax increase since 1993. Now, there’s always adjustments. And mostly, you know, we see cuts in certain areas, or favors, if you will, to certain industries, but really, it’s been since 1993, under the Clinton administration, since we’ve seen a major tax increase, well, the likes of which is being considered right now.

Clark: So, if we were to briefly look at the past, I know there’s so much knowledge that you have on the past, we could spend a whole episode about it, but in, like, less than a minute, what are some of the big highlights about the past and why now is so significant? And also, basically, like, why are we doing tax raises now? I think the past might help us see into that.

Roger: Good point. We’ve seen a number of presidents over the last 50 years raise taxes. Jimmy Carter raised taxes. Even though everybody calls him the great tax cutter, Ronald Reagan had one of the largest tax increases in history in 1982, with the Tax Equity and Fiscal Responsibility Act. George H. W. Bush, some of you might remember, said the, “Read my lips, no new taxes.” And then he raised taxes in 1990. Some say that’s why he didn’t get reelected. And then that last major increase that we just mentioned was Bill Clinton, under the Budget Reconciliation Act of 1993, which was actually a catalyst to finally balance the federal budget for the first time since 1969. So, there’ve been a number of presidents who’ve increased taxes, and one of the things I want to point out is we’ve had some pretty good stock market returns even after those kinds of things. So, I know a lot of people are out there saying, “Oh, the stock market will go, you know, tank if these tax increases come along.” But in the Reagan years, in the ’80s, we had a pretty strong stock market, even though they raised taxes in ’82. And then, of course, after 1993, shortly thereafter, we embarked on the dot-com boom and a booming stock market.

Clark: And bust.

Roger: Well, you know, booms always are followed by busts. So, that’s the nature of the beast that these things kind of go in cycles.

Clark: That’s helpful context.

Roger: Yeah. But the whole idea is that, I mean, a tax increase doesn’t mean all your investments are going to go into the toilet. That’s just not going to happen. But what is going to happen is if you don’t take action, and we’re going to talk more about this as we discuss this somewhat arcane topic of taxes and tax increases, but the thing I want to impress on our listeners is you can just ignore all this stuff that’s happening, but you might get caught up in it and end up paying more taxes, frankly, than you need to. So, you know, in our last couple of episodes, we’ve talked about some examples of how clients have taken advantage of current low rates. You can go back and listen to those on our website, but the idea is, does it make sense to do some tax planning right now, in anticipation of the things coming down the line?

Clark: So, there is a bit of anticipation, meaning we have some ideas of what might be happening, but I understand you’ve got, what, five or six different points we want to make sure we talk about here of what’s being considered right now in Congress. And depending on what’s being considered, that’s going to influence how we’re thinking about this. So, whichever one you want to start with, what are they thinking about right now?

Roger: Well, the things we’re going to touch on really apply to the majority of our listeners. We’re going to talk about things that really affect middle-class folks. There are some things coming down. If any of our listeners have net worth in excess of $50 million, give us a call at the office, or go to our website and send us a contact, and we’d be happy to discuss opportunities and challenges that are upcoming for folks with those kinds of assets. But right now, the things we know are that taxes are going up at the end of 2025. That’s in, under the current tax code, if they do absolutely nothing. And we’ve about this a bunch, and it will benefit some people in states like California, New Jersey, New York, where some of the limits on tax deductions will go away. Things like state and local taxes, property taxes, state income taxes, that used to be deductible than aren’t now.

So, that’ll be a change. It’ll benefit some people, but it will hurt some others coming in 2017. Capital gains tax rates are going to go back up. And so, that’s what we know. The things that are being discussed are in relation to tax equity, you know, making it fairer, some say. And the Congressional Budget Office says that most of the benefits in the Tax Cut and Jobs Act of 2017 accrue to the higher earners, you know, the top 1% to 5% of earners in this country and of wealth, where the tax cuts being considered are designed to create greater equity and give breaks to folks in the bottom two thirds.

In fact, the COVID act that was just passed here recently has some of those tax cuts actually for lower-income folks, in the forms of credits and child credits and earned income credit expansion, that are supposed to lift tens of millions of children out of poverty and things like that. But the next big thing, if you will, in Congress, and it’s being discussed, is an infrastructure bill. The previous administration was going to do one. I don’t know why it never happened. So, there’s a lot of talk about rebuilding bridges that are falling apart, upgrading the infrastructure in the country in terms of communication, electrical transmission, and things like that. But more conservative Republicans, as well as more conservative Democrats, are saying, well, we can have this infrastructure bill, but we gotta figure out ways to pay for it. And that’s where a lot of this talk is coming from. Some of the increases that are being considered are increasing the corporate tax rate from 21%, where it currently is, to 28%, raising the top income tax rate from 37% to 39.6% on incomes greater than $400,000 a year, changing the way we tax capital gains.

This is a big one for a lot of folks, especially around here. You know, if you’ve owned your house for 40 years, you probably have over a million dollars in capital gains in that house if you were to sell it. And so, they’re talking about capping capital gains tax preference, you know… We tax capital gains in our current system at a lower rate than ordinary income. They’re talking about capping that at a million dollars. And if somebody owns real estate or highly appreciated stock, you know, say you bought Apple stock, like one of my clients did back for 5 bucks. It’s split a couple of times. And if they were to sell, they’re going to pay a lot of tax. Well, that might be a really, really good idea right now. We’ll talk more about that in a couple of minutes.

They’re talking about getting rid of some of the pass-through tax preferences. Currently, if you’re an S corp, an LLC, or if you invested in a REIT, real estate investment trust, or other pass-through entities, the first 20% of your income is exempt from income tax. They’re talking about getting rid of that. And oh, there’s also talk about increasing the IRS budget for audits, because audits raise revenues. To remove some of the inadvertent incentives in our current tax system that have encouraged the shifting of jobs and profits from corporations overseas, that was supposed to be addressed in that Tax Cut and Jobs Act of 2017. But actually, we’ve seen an acceleration of exportation of jobs since that was passed. The old law of unintended consequences.

And finally, there’s talk of limiting the tax preference of a 1031 real estate exchange. This has been a very, very powerful tax benefit for real estate investors over the years, because you can sell a property and defer paying your capital gains tax by exchanging into another what’s called like-kind property. So, basically, investment income property into another investment income property would qualify, as long as you follow a lot of very arcane rules. We help clients with 1031s all the time, but this may be a very good year to reposition if you’re one of those people who’s held onto a property for a long time, and you’ve seen your property appreciate, but not the rental income. So, maybe you’re getting 1% to 2% yield on your equity, where that can really go up to 4% or 5% or 6%.

So, in light of knowing some of these increases are coming, there’s a bunch of other ones being considered, but I wanted to touch on the ones that are most likely to get approved. And that would be the changes to capital gains rates, increasing higher-income folks’ taxes. The state of California is considering some tax increases as well. And I know a lot of our listeners are here in California. So, you can do what you want. You can ignore the coming wave of tax increases, or you can just take advantage of the rules that you’ve got available right now, in order to minimize the tax bite.

Clark: Yeah, that’s a good way to think about it. There’s a bite that’s coming, and you can get ready now. So, with what’s most likely to happen, for someone to really get a full picture on this, and you use words like repositioning and restructuring, really, that takes a lot of time to do. And that’s something that someone can reach out to you and your team, and you’re gonna help unpack everything and map that out. But generally speaking, are there one or two general things that someone might be thinking about as they know that this bite is coming?

Roger: Well, yes. I think you put that very well, Clark. I think the things that our listeners should really be strongly considering at this point, number one, if you have highly appreciated stock or other assets, it may be time to cash in and pay taxes on it. Now, you might say, well, “But I like Apple stock. I don’t want to pay that tax now.” It just may make sense to sell, pay taxes now, and then use those proceeds, after paying the taxes, to reinvest at these higher levels, because of the likelihood of paying higher tax on your profits later. That can be a very powerful strategy.

Another is to take advantage of the 1031 rules right now. If you own investment real estate and it has appreciated, or what’s also contributes to that big tax bill is something called depreciation recapture. And again, we’re not going to get too deep in the woods here. I don’t want to put everybody to sleep, but if you’ve owned investment real estate for 20, 30 years, you’ve reduced what’s called the cost basis, because you used that to shelter income, and upon sale, you are going to recapture that and pay taxes on it. So, doing an exchange, repositioning for, whether it’s estate tax purposes, you know, if you’ve got one big property and you’ve got two kids, you might want to exchange into two other properties, or a Delaware statutory trust, which make estate planning much, much easier. That might be something that you really want to take a strong look at with your financial advisor and/or tax advisors this year.

And then finally, a really big one that I know a lot of advisors that I talk to are strongly encouraging clients to either make withdrawals from their IRAs, 401(k)s, and other tax-deferred retirement plans, or to consider doing Roth conversions. Now, Roth conversions, basically, you just, say, you’ve got a million dollars in your IRA. We know that that money, when it comes out, will be taxed as ordinary income. And if those ordinary income rates are going to go up, you might want to pay the taxes now, depending on your overall situation. There’s a little more to it. We have a calculator that can help determine whether a Roth conversion or a partial Roth conversion makes sense to you. As I was just mentioning, if you had a million dollars, you might want to convert $100,000 or $200,000, depending on your other tax situation, and convert that to a Roth…

Clark: Got it. I thought you were going there.

Roger: …so that in the future, you’ll be able to make those withdrawals income tax-free. And hopefully, you’ll get some nice growth between now and then. And, you know, I’ve seen situations where literally hundreds of thousands of dollars of increase in spendable income and spendable assets can be achieved for your future by taking some of these issues and dealing with them right now.

Clark: Right. And it’s awesome to know that you’ve got a tool like a calculator that you can make data-driven decisions on all this stuff. Because as we’ve talked before in the podcast, a lot of this stuff can get emotional, and you don’t want emotion to be driving your decisions, right?

Roger: Well, yeah, we don’t want emotions to be driving it, but we also understand that these strategies aren’t right for everybody. So you need to know, does this make sense for me? I have not run into two situations, two personal financial situations, in my entire career that are identical. There are some similarities here and there, but everybody’s situation is different. And so, where something might sound like a good idea, it’s good to run through the exercise, like you said, a calculator, for example, if you’re considering a Roth conversion, or taking capital gains now versus in the future based on the kind of results you’re getting from your investments and those kind of things.

Now, some of the changes that’ll be coming, I just read this morning that there’s talk of removing the cap on mortgage interest deduction from $750,000 to $1 million dollars. Of course, you have to have the right kind of mortgage to get that deduction, and your income has to fall within certain limits. Also, they’re talking about restoring the full tax deduction for paying state income taxes, for your property tax, and as I forementioned, your mortgage interest. That could be huge for people living in high state tax states like, California and New Jersey, Connecticut, and New York, because a lot of those people lost deductibility under the last tax act.

Clark: Wow. Now, what I’m hearing from you is you don’t want emotions to drive what you’re doing, but you also need to realize that not everything is going to fit everybody. So, it all is customized, and you have to spend the time to think through all of this. So, that being said, what’s a good first step for someone to connect with you and to start maybe untangling how they’re thinking about this, and getting ready for that bite, and maybe preparing for that shift that is inevitable.

Roger: We know the shift is coming. That’s a given. How it’s going to look, we’re not exactly sure, but we can make some pretty educated guesses based on both the political climate and economic realities of the infrastructure bill that, one way or another, it’s coming. It was probably, you know, the single biggest campaign promise that Biden made was about infrastructure and the job creation. And in the long run, a bill like that should be net positive for long-term economic growth. But as we transition tax codes, it’s very important that you keep your eyes open and your ears open, so that you can see what’s coming and take appropriate steps.

Clark: That’s good. I have enjoyed this. It’s got my wheels turning on what is to come, and I’m already thinking through a lot of this. So, very helpful. I know we try to keep everything as evergreen as possible on the show, no matter when someone joins and is listening along, but it is nice to hear some of the things that are happening soon. It’d be nice to look back, too, maybe, and say, hey, some of these things, they’re not going to happen, maybe immediately. It’s likely to still happen sometime in the future. It’s just a matter of when.

Roger: Well, absolutely. And I would encourage our younger listeners, or if there’s retired folks, if you’ve got kids, you may want to mention this podcast to them, because folks like you, Clark, have a tremendous opportunity to utilize current tax rules to accumulate wealth in tax-advantaged situations. A lot of my generation, the baby boomers, we grew up in a different tax regimen. And some of the strategies that we were led to believe, things like, you know, pretax IRAs, people are finding out that that’s led to some tax problems, they haven’t gotten to spend as much as they thought they would, given, you know, the amount of wealth that had been created in these plans. And you really have opportunities now, as you accumulate wealth and assets, to do it in the most tax-smart ways. So, I would encourage that to our listeners, to let those folks under 50 know about the importance of this. And I think, as you were mentioning before, you know, a good way to create that context is to go to our website, download the Thought Organizer, and really create that clarity of where am I going with all of this? What do I want out of it? And how much stress do I have to deal with down the road?

Clark: Yep. The Thought Organizer, it comes in handy.

Roger: It certainly does.

Clark: Well, Roger, thank you as always for taking the time. I really enjoyed it.

Roger: Well, you take good care. And to everybody listening, stay safe and well, and get your vaccine when you can. I happily had my second shot about a week and a half ago, and feeling pretty good about all that.

Clark: That’s good. Good things are to come in the future. That is an optimism I think we can finally start to feel.

Roger: Amen to that.

Clark: Roger L. Gainer, RICP, ChFC, California insurance license number 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial & Insurance Services, Inc. is not owned by or affiliated with HFIS, Inc. and operates independently.