Proposed tax changes (2021)? Let’s take a closer look.
“We Have Nothing to Fear Except Fear Itself”
—Franklin D Roosevelt
We are constantly being bombarded by headlines and stories that are purposely designed to invoke the fight or flight mechanism in our brain. I have been writing about it since 2019 asking, “When will the financial doomsday cult be right?” Two of the topics that have recently come up in conversation, thanks in part to the headlines, are inflation and the proposed tax changes. We’re going to look at these in this week’s Inside Look at Building Towards Wealth.
I had a meeting with a client recently. Let us call him Mike. Mike makes a very strong income from his business. During our end-of-the-year planning conversation, he brought up some questions regarding what we should do to plan for the proposed tax changes. He had recently been hearing about the latest tax proposals being discussed by Congress and the administration. I asked him why he had such concerns. It was his impression that based on his income that tax changes would raise his taxes significantly.
Let’s look at how the proposed tax changes would affect him:
Working in conjunction with our tax modeling software, we did a rough estimate of what he was going to pay. What we found is that assuming he had the same income as last year, he would see about a 6% decrease in the amount of tax paid by him and his family.
Now there are quite a few reasons why this might be for him. Being in Illinois the proposed removal of the SALT caps amongst a few other changes were contributing factors.
These numbers are not final and I told him that he should definitely consult his tax professional to verify them. But this was a case of the headlines he was reading. They were nor matching up with the reality of the situation.
We should also note that we have been talking about the proposed tax changes since we had the question How Could the Proposed Tax Changes Affect Me? back in May.
The headlines not matching reality could also be true for inflation.
When we look at the numbers if you already own a house or even refinanced, (and you didn’t purchase a new car, or didn’t have to travel much in a car,) the rate of inflation that you’re hearing, 6.2% based off the recent news, is most likely not what you’re actually experiencing.
The Consumer Price Index Summary tells us that the largest increases are gasoline, used cars, and piped gas. If you don’t use a car much and/or haven’t bought a new car, you are likely trimming a good section off of inflation already. Throw in the fact that we are still seeing low-interest rates for mortgages. If you refinanced in the last year and reduced your interest rate, you would have seen another decrease in your cost of living.
Even if you did not refinance, those who own their home and have a fixed principal and interest payment would not be as affected by any inflation in housing prices. Looking only from a property ownership perspective, inflation in the housing market can be disinflationary to the property owner. This is because their payments are the same and their home will generally increase in value.
The inflation that we are seeing is not quite at the same level depending on your circumstances. This is not to minimize the effect it is having on some people. But the headlines make it seem like everything is three times more expensive. It depends on the lifestyle you’re living. So again, make sure that you are not swaying by flashy headlines, or what you see on the financial networks. Because oftentimes those headlines are written for an effect to cause fear and panic. When the situation is likely not nearly as severe as they want you to believe.
Tax and/or legal advice is not something Chris Clepp offers. Please consult with your tax professional for additional guidance regarding tax-related matters. For advice appropriate to your specific situation, please consult a financial professional.