Market Update – 9/17/2021

Categories: Financial News, Family OfficePublished On: September 21st, 2021Comments Off on Market Update – 9/17/202115.5 min read

House Democrats outlined a bevy of tax hikes. The proposal includes an increase in corporate income tax from 21% to 26.5%, minimum tax rate for overseas income of U.S. companies from 10.5% to 16.6%, individual income tax rate from 37% to 39.6%, and capital gains tax of 25%. The proposal also includes a 3% surcharge on individual income above $5 million.

Tax increases seem to be an inevitable long-term trend and will have a great impact on investors. If the proposal is passed, the long-term capital gains maximum tax rate will increase from 23.8% to 31.8% for certain taxpayers. Taxpayers living in states with high state taxes such as California will owe as much as 45.1%. Tax increases on companies will also affect corporate profits and have an impact on the market.

The following is our advice to our audience on 08/13: “In addition to pursing investment returns, more attention should be given to tax planning to pursue higher net after-tax returns. Investors should prioritize the use of tax-free or tax-deferred accounts. In addition to the retirement accounts (IRA, 401k, etc.), high net-worth families can also consider Private Placement Life Insurance (PPLI) that puts stock trading in an insurance policy to achieve income tax-free status. Since everyone’s situation is different, it is best to have professionals provide targeted advice after analyzing your financial profile.”

What needs to be emphasized is that since the focus is on after-tax returns, it is necessary to avoid solely focusing on the impact of taxes and ignoring the total return. For example, municipal bond income is tax-free, and the after-tax return was 0.3-0.5% higher than government bonds before the start of pandemic. However, government bond yield rose rapidly in the first half of the year while municipal bond yield remained unchanged. As a result, municipal bonds are now much less attractive to high-income earners as the tax equivalent yield of municipal bonds is almost the same as safer government bonds.