On this episode, Karl Eggerss dives into some of the tax changes that are in the latest proposal. There is a sigh of relief for some while others may expect a higher tax bill.
Welcome to the podcast, everybody. Thank you for joining me. My name is Karl Eggerss and this is Creating Richer Lives, creatingricherlives.com is the website, the telephone number 210-526-0057. If you need any help with your finances, a particular situation, you need some clarification on something, we are here to help. You can always go straight to the website. There’s even a place on there to have a 15 minute conversation. You can click on it, you can schedule your own time and that’s right on creatingricherlives.com. Well, I hope you’re having a great week. We got a lot of stuff going on. The market’s been kind of flat lately. And so it doesn’t seem like there’s a ton of things going on, but at the same time, we have some potential changes in the tax plan that we’re hearing about.
We all know that taxes are probably going up. We just don’t know how much, who it’s going to affect, and we continue to get proposals and possible changes. Well, we got another one this week, and so we’re going to go through some of things that might or might not affect you, and maybe you were going to be affected in the first proposal. And here’s another proposal that’s a different one. And maybe you are in a better situation than you would’ve been under the first one. So we’re going to go through some of those things. But before we do, I did want to talk a little bit about the markets, because there is a lot of questions as to why the markets continue to hang in there, given what seems to be a really constant flow of negative information. It’s probably the number one question I get right now is, how on earth has the market not crashed yet?
And let’s first digest the word crash. I think we had that, right. We had that in 2020, that was a crash. It was a quick, violent, sharp move down, a horrible, some people would say it was a bear market. Some people say it was a crash, regardless. It was a little more volatility than most of us are used to and most of us want, but since that time we’ve had a recovery. We’ve had a recovery in the economy, we’ve had a recovery in the stock market. We’ve had recovery in the real estate market, all of these things. And yet we continue to get more and more negative news flow that may put that in jeopardy. And the question is, how can we still be in the 35,000 range on the Dow Jones, given all of this negativity. And there’s a few things, on the negative side of the ledger, we have the federal reserve is likely going to start not purchasing as many bonds.
So they’re doing the quantitative easing and they may start tapering that. Now they’re still going to be purchasing a lot, but they’re doing this to keep interest rates down, to keep the economy going as they see it, doing it. And they’re going to slow that down a bit. Now they’re still going to be purchasing a lot, but they’re going to slow down. That’s likely to happen at the end of the year. So it’s the first sign that the fed is changing their tune. Now they’re probably not going to raise interest rates for a long time, but still this is the first step in ending some of that stimulus. We also have the economy that is clearly starting to slow down, whether it was Delta induced, or it was just the fact that look, the economy had bounced back so sharply, it has to slow down just on a relative basis.
So that’s happening. We still have a lot of supply dislocations, for you business owners, you know what’s going on out there. I heard a story the other day that at one of the ports in LA, they have a wait of eight days, so these ships are just sitting there. And so you can imagine the bottleneck. So ordering goods to put together is delayed, which means it takes a long time for it to get to you, which means it’s just a potential slowdown. So you still have that, at the same time, that supply issue is also causing price increases. So we have the demand side still there. We have the supply side shrinking. And so we still have this higher than expected inflation rate. And that’s going to persist for some time. We’ve been saying that on this podcast for months, that it’s going to persist and it’s going to be a little higher than you think, or that you’ve been used to, I should say.
Maybe a lot of you do think that, but that you’ve been used to the last several years. And so you have that plus the geopolitical risk. We got the travesty in Afghanistan. We have all kinds of things going on right now. And Delta is still there. We still have lots of people around us that have the coronavirus, that continue to get it. We still see people in serious shape, bad shape from it. It’s also leading to a slowdown. So you have all these different things going on, on the negative side of the ledger. But the big asterisk, big elephant in the room is the stimulus. The fed is still buying a tremendous amount of mortgage bonds. They are buying all types of things. And by the way, remember, we still have interest rates really, really low.
And they’ve telegraphed they are not going to raise those anytime soon. And don’t forget all the stimulus that we had in the system prior, from the PPP owns for businesses to the stimulus checks, to the extra unemployment benefits. There was just a lot of money put in the system and it’s still working its way through. So the liquidity is outweighing or at least equal to all the other negativity. That’s why the stock market is hanging in there in my opinion. And really to me, interest rates are the key. If interest rates stay low, we know that trade, big cap, technology stocks, growth stocks tend to do well. If interest rates start to rise, you could see that major shift like we saw back in November, December, where we started to see the value stocks, the small caps, those things really outperform.
So you have this Ying and this Yang, we continue to see things like commodities go up. So there are things that are continuing to work in this environment. But if you look at the stock market, it has been drifting sideways. The Dow Jones is roughly at the place it was back in May, but under the surface, you have a lot of stocks that are down quite a bit now, you have a lot of stocks that have fallen. And so there’s some churning going on. There’s some weakness under the surface, but is it just a correction in time? Meaning we’re just moving sideways, but we’re getting a correction, a lot of stocks, or are we setting ourselves up for something bigger? Well, we can’t predict that. Of course, and people are asking me, well, what, what do the indicators say?
Well, the indicators say that there is weakness underneath the surface, but that has to persist for a while to start saying, “Hey, we’re going into a bear market, or this is going to be persistent.” We’re not there yet. This is a market where you continue to stay balanced. I think you continue to watch what’s going on. By the way, one of the other negatives on the ledger, on the negative side, is the tax increases, which we’re going to talk about. But you continue to watch all those things, but just don’t get over your ski’s in terms of leaning too far one direction or another, whether to bearish or to bullish. You think the market’s going to go way up or you think it’s going to go way down, the market’s drifting right now. And there’s certainly some things working that are in certain areas, but for the most part, we had a massive run.
Especially since the 2020 lows, but even the year, from November when the vaccines were first announced they were coming until people started getting them in January. We had a massive run in the stock market in the first few months of the year. And we’re just drifting sideways now. So too early to call to say, “Okay, that run is over.” Because we still have low interest rates. We still have stimulus there. And we still have an economy that’s growing. Even though the economy’s starting to slow, it’s still growing. When you put that together, that’s a pretty good recipe, but there are very expensive parts of the market. There’s things to stay away from. There’s risks out there. So you got to be prudent. I think you got to be well balanced. And again, diversified does not mean 60% of your money in the S&P 500 and 40% in the Barclays Bond Aggregate Bond Index, that has worked for several years.
I don’t think that’s going to work going forward. That’s my personal opinion. So you have to be balanced. You have to be really diversified. If you don’t know what that is, give us a call. We’ll take a look at your portfolio and see where maybe some of your holes are. So, that’s a little bit about the market. So again, nothing to do right now, in my opinion, but to be balanced, if you have cash on the sidelines, look at an averaging strategy perhaps, but a lot of things going on in the markets. But that doesn’t necessarily mean you have to do something in your portfolio just yet. Well, let’s shift to this proposed tax legislation. What we’re seeing is, this came out earlier in the week, and it’s the American Families Plan. Remember part of the fear was that we would be getting massive tax increases.
That was a big, big fear, and time has gone on. And there wasn’t a lot of traction on that. And the market has probably been going up partially because of that reason. Where it’s going up because they see the writing on the wall that maybe some of this aggressive agenda on tax increases isn’t going to happen. And so this week we got the anticipated American Families Plan, and there’s some things in there that are noteworthy and I don’t have time to go through every single thing that’s on here. And we’ll have more on it probably in the next few weeks. But one of the big things we heard of was capital gains could essentially double, going up as high as, maybe even higher than the highest ordinary income tax rates. And that isn’t going to happen in this proposal.
We’re now looking at a capital gains rate that is 25% on the high end, not the 39% or 40% like we were hearing about prior. So that’s a sigh of relief, but what does this mean for you? Well, when you look at the capital gains rates currently, if you’re married and you have income under $80,800, then the capital gains rate’s zero. And that’s not changing in this proposal. If you have income over $80,000, up to $450,000, it’s at 15%. And it used to be up to $400,000. So that’s the vast majority of people are going to be paying capital gains at 15%. That’s not really changing. In fact, it’s a little better. Where it changes is in these higher levels. Again, when you have income over $450,000 or so, that’s when you’re up to 25%.
But again, that’s a sigh of relief, because some people were looking at 40% before all of this came out. What about the stepped up cost base? Remember that was going to be eliminated under the Biden administration’s proposal, they wanted to eliminate that. I didn’t ever think that was going to have traction. There’s too many politicians that want the stepped up cost basis there for obvious reasons. And that’s not mentioned that I can see. So that’s a good thing for most of you that that may not be going away. Now the top rate currently, the income tax rate, which is really high income earners are really in the crosshairs here. 37% is the top nominal marginal rate, it is proposed to go up to 39.6%. And that’s for income over $400,000 for an individual or $450,000 for a married filing jointly. And by the way, I forgot to mention on the capital gains, you’ve heard about this, making it retroactive.
They want to continue to make it retroactive. But as I’ve been saying for a year, as the calendar keeps moving, they keep chasing this calendar. And it’s very hard to make stuff retroactive back to April or January or whatever. They want to make it retroactive to September 12th. So if gains were booked prior to September 12th, then you’re still at the old rate of 20%. And if it’s after September 12th, you’d be at this 25% again for high income earners. What they don’t want is clearly people knowing the rules, selling before the rules kick in. But the logistics of changing tax rules mid-year are very, very difficult to do. So I’m a little leery that that will happen. I don’t know if that will happen. Now for you business owners, that especially have an S corp, you have not been subject to employment taxes, net investment income tax.
That was that extra 3.8%, that might change for again, high income S corporation owners. And so that could change. So again, some of this has to do with business owners, some of it has to do with individuals. On the corporate side, this is something we heard about for a while is that corporate tax rates might go up. So currently the corporate tax rate’s 21%. And remember, there’s a lot of talk about, “Well, the higher you raise corporate taxes, that’s just a tax on you and I, and it’s going to flow down and they’re going to raise prices on goods and services. And so it’s really just a higher inflation tax, really for us consumers.” Well under the corporate tax rate currently it’s 21%. The proposed, again, after 12/31 of this year, would be 18% on the first$ 400,000 and then 21% from 400 to $5 million.
And then above $5 million, you get 26.5% top rate. So again, when you hear headlines like, corporate taxes are going up and you think, well, I own a business. My taxes are going up. Maybe, maybe not. It depends on your profits and your income. So again, tax legislation is really honed in on high income earners for sure. And there’s a lot of things in here and it’s again, impossible to go through all of these. The tax brackets themselves, that’s another area that a lot of people had a lot of benefit in the last few years, because the brackets got really, really wide, if you recall. You got a 10% bracket, a 12%, a 22, 24, 32, 35, 37 and 39.6 in this proposal. And so under the current, there was a 37 under the new 39.6 kicks in. So let’s look at the brackets, really the main changes to the brackets right now, there’s not a whole bunch of change of what’s currently under law and what’s proposed.
So let’s take a married filing jointly under the current and proposed, there’s no changes until you get up to, I would say over the top brackets. So 35% used to go to $628,000. So you could make up to $620,000 and not go into this higher bracket. That’s been lowered to $450,000. So if you’re over $450,000, you’re going to be at a 39.6 bracket. That jumps quite a bit. So again, for most of you, if you are underneath $418,000, you’re not going to see any changes from what’s out there right now, which is the bulk of your income tax rates would be in these low twenties. That is not going to change. So the brackets got really wide. Of course we had the big standard deductions. So a lot of people don’t even itemize anymore.
One other thing that is in here that you need to be aware of is, there’s strategies out there concerning Roth IRAs, the backdoor Roth IRA, the mega backdoor Roth IRA. These were all ways to essentially play a little bit of chess with the Roth IRAs and still get money into them and benefit from them, even if you couldn’t put money straight into a Roth IRA because of income limitations. And under this provision, those would go away. And so again, don’t need to get into the details, but if you’re somebody that has been using the backdoor Roth, you’ve been using the mega backdoor Roth through your employer, that will probably go away if this passes. And again, all of this is a proposed tax legislation. Things can change, may not pass, may be changed. And oftentimes it is. So even if this happens, there could be things in there that are changed.
Some of these things are used as a bargaining chip to get something else. There’s something else in here regarding wash sales. So right now, if you have a loss in something that you own, an investment, and you sell it, you can’t buy it back for 31 days without being able to deduct it. So basically what that means is, if you sell it, buy it back in day 10, you can’t write it off. You can’t write that loss off. You have to wait 31 days. And what’s interesting is this has not applied to cryptocurrencies. Now yes, everybody out there has never taken a loss in a cryptocurrency and everybody’s making all kinds of money. No, that’s not it. Tons of people have lost a lot of money in cryptocurrencies because cryptocurrencies have gone through 90% drops before, a lot of them don’t exist anymore.
So there’s losses out there. What’s interesting is for crypto currencies, some commodities, foreign currencies, you could sell a cryptocurrency and immediately buy it back and use the loss on your taxes. There was no wash sale for digital assets. Now, beginning next year, that’s going to change and it probably should. Why should I have a wash sale rule on a stock and not have the same rule on a cryptocurrency that people are trading. So that is something that will be cleaned up and will not be around, if this goes through. The current child tax credit is extended under this through 2025. So, that’s another little provision in here. There’s also something in here regarding large retirement accounts. And again, it’s complicated because it has to do with your income in conjunction with your retirement balances. But basically if you have retirement accounts over 10 million, but less than 20 million, there’s certain RMD rules that would be in here.
Over 20 million, there’s certain rules pertaining to how you have to take them out, regarding Roth IRAs. So a lot of details in here, which we’ll have over the next few weeks and months, but just know that again, a lot of this is geared towards high income earners, but also there’s some things in here that are related to your retirement accounts as far as putting into them and also distributing out of them. So I hope that’s helpful going through a few of these high level details that are coming out and we’re going it fast and furious is here. But hope you guys have a great day. Thank you for listening. Don’t forget, creatingricherlives.com and our telephone number 210-526-0057. Take care, everybody.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there could be no assurance that the future performance of any specific investment, investment strategy or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multi Family Offices, LLC, Covenant, or any non-investment related content will be profitable. Equal, any corresponding indicated historical performance levels be suitable for your portfolio or individual situation or prove successful. Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for, personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation. He/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at creatingricherlives.com.