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Peter Locke

President Biden’s 2022 Budget Request will change the way you plan

The three takeaways in this article: What you can expect regarding the Increase Capital Gains Rate How Estate Planning & Gifting will change next year How to use Tax Credits for parents and children While I was out to lunch with Sue, a small business owner in the Event Planning space, she asked me about Biden’s proposed tax increases and if she should be doing anything about it. Given that Sue is nearing retirement and her business is very profitable it was important to discuss how the proposed budget would impact her and the business.   Sue was hoping to work for 3-5 more years and then sell her business when she reaches 65 for Medicare purposes. While this is very much still an option, Sue and I decided to review her situation in more detail so she could make the most educated decision moving forward. Since selling a business and retiring is a massive decision in itself, if the new proposed tax law changes would help make her decision easier then it was my job to let her know.  The Capital Gains Rate is expected to increase from 20% to 39.6% on income in excess of $1 million Proposal: Increase the top capital gains rate (raising the capital gains tax is an alternative to raising the estate tax exemption) currently at 20% to 39.6% before application of the 3.8% net investment income tax for income in excess of $1 million (possibly retroactively – Yes, this can be done due to Article I, Section 9 of the United States Constitution) Ex: In 1993, the top ordinary income tax rate was increased on both ordinary income as well as the estate and gift tax retroactively to the beginning of the year (even though it was enacted in August).  What can Sue do: It may be worthwhile to accelerate the sale of her company in order to capture gains at today’s current top capital gain tax rate. Additionally, those that have appreciated land, real estate, stocks, collectibles, etc should look to do the same.  Ex: Sue (60) owns a company that she is looking to sell in the next 3-5 years as she is nearing retirement. Her income is typically $300,000 and the value of her business is $3 million. If she sells her business this year she will pay 20% instead of 39.6% (plus the 3.8% medicare surtax) on any income above $1 million. So, $460,000 (20% x $2.3 mill) vs. $910,800 (39.6% x $2.3 mill). The difference being $450,800 which if you invested at a 6% rate of return over the next 30 years (Sue at age 90) would be $2.58 million dollars.  Sue’s Options: Keep the business until she is ready to sell, sell the business now, or sell the business and consult the acquiring company for a set number of years for a lower sale price.  Our Guidance: Sell the business and consult the new company. This will enable her to bridge the gap between now and Medicare when paying for health insurance out of pocket is extremely expensive, capitalize on a low capital gain tax rate, and provide her the peace of mind that her clients will be taken care of while she collects an income.  Estate Planning & Gifting Death itself would become a capital gains realization event (1 million exemption) Gifting is now a realization event (so if you’re looking to gift an appreciated asset soon it may be worthwhile to accelerate that into this year)  Ex: If you gift an asset that has a basis of $100k and it is now worth $1mill then $900k would be taxed immediately. Previously, the recipient of the gift would not realize a taxable event until the asset is sold.  Tax Credits for Parents and their children are increasing Child and Dependent Care Tax Credit refundable credit up to 50% of up to $8,000 in expenses for one child/disabled dependent ($16k for more than one child/disabled dependent) with a phaseout and an exclusion of up to $10,500 in employer assistance/contributions for dependent care.  *Child Tax Credit extends the ARP child tax credit through 2025, including a maximum of $3,600 for children under 6 and $3,000 for children 6 through 17. Half of a taxpayer’s total allowable credit would be received as monthly advance payments and half would be paid when households file their taxes; any discrepancies would be reconciled on tax returns. Notably, by proposing that only half of the credit be paid out monthly, the resulting maximum monthly payments would be $150/$125 per child for 2022 through 2025, with the rest received at tax time, compared to maximum monthly payments of $300/$250 under the current ARP child tax credit in 2021. Full refundability, regardless of earned income, would become permanent. *Source – Biden Proposed Child Tax Credit Here are some additional facts and what you should know: The QBI (Qualified Business Income) deduction is here to stay – QBI Deduction – IRS 1031 exchanges, if you’re a married couple then Biden is proposing a 1 million per year cap on 1031 exchange exemption (500k for single filers) – 1031 Exchange – IRS Proposed 3.8% surtax to S-Corps distributions There have been talks about getting rid of  “Zeroed Out Grats” and rolling GRATs  What should you be doing now?  Think about your goals and objectives for your life, employment, gifting plans in order to prioritize the next steps If your income is less than 1 million then proposed tax increases don’t affect you Plan now and prepare while you have time. Planning on selling a business, piece of land, or real estate in December is not feasible. Sit down with your tax professional and CERTIFIED FINANCIAL PLANNER™ to plan the next steps

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Denver Investment Experts Financial Planning
Articles
Kevin Taylor

Nikola Jokic was Robbed – and is a good lesson about this market

Let me tell you about Nikola Jokic, the Denver Nuggets’ skilled center, and basketball poet. Despite his impressive performance, he was unfairly overlooked and missed out on his third MVP recognition. Jokic’s numbers in the 2022-2023 season were exceptional – and he represents the most “value” any player in the NBA brings to his team. When Jokic is on the court, the team boasts an impressive +380 plus/minus* rating for the season. However, when he is not playing, their plus/minus rating drops to -201. His individual contributions are highlighted by his average plus/minus per game of +6.1. If the Nuggets performed at an average level without him, their win/loss record is projected at 58-24. However, without Jokic, their Net Rating plummets to -7.7, resulting in an expected win/loss record of 22-60, a significant decline of 36 wins. Although it’s disappointing that Jokic didn’t win his third MVP title, it’s crucial to recognize and appreciate the impact he makes, similar to the mega-cap group of $1T companies discussed below, and how it relates to the U.S. stock market. Likewise, when the five largest companies by market cap are removed from the S&P 500 we see a much different performance than we’re seeing right now…  A tale of two indexes:  On May 30th, Nvidia made headlines by joining the exclusive $1 trillion club for the first time. As a maker and designer of A.I. hardware and software, Nvidia achieved this remarkable milestone by raising its valuation by a staggering $280 billion or nearly 40% since May 15th. This extraordinary leap in value is unparalleled in the history of capital markets, although the company closed just below the trillion-dollar mark. However, there is a downside to Nvidia’s success, which reflects the overall trend of trillion-dollar companies this year. The five members of the Trillion-Dollar Club, including Apple, Microsoft, Google parent Alphabet, Amazon, and now Nvidia, have witnessed a synchronized surge in their market valuations. This surge among a select few has single-handedly propelled the S&P 500 index to +9% YTD. Without these “Super 7” (including Facebook and Tesla) the rest of the SP500 has moved less than 1% for the year. While the +9% move of the SP500 may seem positive at first, it raises concerns about the market’s dependency on these few mega-cap companies. The exorbitant prices they have reached may already be stretched to their limits, making it unlikely for them to sustain the market’s upward trajectory. The rise of Nvidia exemplifies the frothiness that has enveloped the Trillion-Dollar Club. The Trillion-Dollar Club has accounted for nearly all the gains made by the S&P 500 this year. Apple, Microsoft, Alphabet, Amazon, and Nvidia have each experienced significant increases in their market caps since January, with Nvidia leading the pack at a remarkable 176%. Together, the current members of the Trillion-Dollar Club have added a staggering $2.87 trillion to their combined market cap since the beginning of 2023. These were names that we were and in some cases still are bullish on, but the concern then comes from looming weakness in other parts of the market.  Interestingly, this rise is only slightly higher than the overall increase in the S&P 500, which stands at $2.98 trillion. Consequently, the Trillion-Dollar Club’s contribution amounts to 96% of the 9.5% year-to-date increase in the index. In essence, we can think of the Trillion-Dollar Club as a company called “Big 5 Llc”. This “company” has seen its valuation surge by 46.2% from $6.2 to $9.1 trillion. On the other hand, the remaining 495 companies in the S&P 500 have only experienced a combined gain of 0.3%.  Without the tremendous boost from the Trillion-Dollar Club, the S&P 500 would essentially be flat for the year. We have been bullish on these chip makers and tech companies for some time (examples below) but think the recent run is getting a little too exuberant and divorcing from the broader market.  Places where we discussed the potential in the AI and Chips group: The Bifercated Landscape of the “Technology” Group: Exciting Investment Trends to Follow The investment opportunity in semiconductors When does a Bear look like a Bull? The overwhelming weight of the Trillion-Dollar Club has made the S&P 500 lopsided. At the end of 2022, the club accounted for 17.6% of the S&P’s total valuation. Now, it represents 25.6%, meaning that more than one dollar in four is attributed to these mega-cap companies. As their combined market cap has increased by nearly $3 trillion in just five months, the Big Five have become significantly more expensive. Their overall price-to-earnings (P/E) ratio, which is the total valuation divided by combined net earnings, has risen from 27.7 to 40.6. This indicates that investors are receiving 33% fewer dollars in earnings for every $100 they invest compared to Christmas of 2022. To put it in perspective, the current P/E ratio for the Trillion-Dollar Club is almost twice that of the overall S&P 500. This situation is concerning, considering that the Trillion-Dollar Club has already achieved substantial earnings growth since the start of the pandemic. In 2022, these seven companies generated approximately $224 billion in net profits, which was 50% more than their pre-COVID earnings in 2019. Therefore, the high multiples at which they are currently trading come on top of potentially unsustainable profit levels. The concern from here is that any weakness in this small group would be felt significantly in the broader market.  This narrow leadership can be a good sign if the momentum becomes contagious and the cash on the sidelines is brought into the market. But while cash is so lucrative, the velocity at which the cash comes into a market expecting a recession is unlikely. However, three main risks persist: Interest Rate Risk – More Constrained Lending Coming: One significant risk in the current market is the potential for more constrained lending due to interest rate changes. When interest rates rise, borrowing becomes more expensive, which can lead to reduced consumer spending and business investment. Higher interest

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Taxmageddon
Articles
Kevin Taylor

‘Taxmageddon’ deferral strategies that you might want to punt on

‘Taxmageddon’ deferral strategies that you might want to punt on   Installment payments from asset sales  Installment sales are designed to postpone the recognition of taxable gains until installment payments are received. Postponed gains will probably be taxed at the rates for the years they are recognized. So, if rates go up, installment sellers will likely see their strategy unwound with climbing tax rates.  Maxing out on deductible IRA and retirement plan contributions Traditionally, savers use 401ks and IRA to defer taxes into the decades to come. So the tax savings we calculate for clients call them to use this vehicle to pay a lower rate in the future, if the rate in the future goes up, the value of this deferral to the saver is diminished. The taxable portion of IRAs and retirement plan distributions received in future years will be taxed at the rates in effect for those years. Prepaying deductible expenses Tax savings from current-year deductions from prepaying expenses are calculated using today’s rates. If you don’t prepay and tax rates go up, you come out ahead by claiming deductions in a later higher-rate year. This might also be a first, calling for deductions to be used in the years to come, to offset tax rates at a higher clip.  Additional Resources for ‘Taxmageddon’ Tax Mitigation Playbook Download Opportunity ZoneOverview

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