Did Bill and Melinda Gates decide to get divorced now because of potential changes in the tax law? That’s the speculation in the wealth management community, where many advisers are discussing proposed changes in the tax laws with their clients.
The Gates family fortune is primarily tied up in their foundation and will continue to be jointly managed by the couple, according to reports. Neither is worried about spousal support, since they reportedly receive $300 million a year in dividends alone! Their sudden split, likely coming after some extensive financial planning, is being tagged as a reaction to tax proposals in Washington. Two separate estates may incur lower taxes than one large one under plans being considered.
Now, before you dismiss this speculation as a problem only for the very wealthy, you might take another look at the possible impact of tax changes on your family, especially if you’re a baby boomer on the cusp of retirement.
Tax the rich
Making the wealthy pay their “fair share” of taxes has an appeal that is undeniable these days. But history says that taxes often start out aimed at only a few but quickly entrap the many unwary.
When the modern federal income tax was enacted in 1913, the top tax bracket was 7 percent on all income over $500,000 ($11 million in today’s dollars); and the lowest tax bracket was 1 percent.
Once enacted, tax brackets inevitably expand to entrap more income. That’s why tax cuts are historically more memorable than tax increases.
It’s not the incidence of the tax, but the burden of the tax
An economics professor warned students that while a tax may be levied on a specific group of people or category of businesses, the impact of the tax could be far different. Smart individuals figure out ways to avoid those taxes. And businesses simply pass the taxes along to consumers in the form of higher prices.
Then, when taxes get excessive, the smart money simply stops working or investing for growth. You can’t force people to build businesses or invest capital if the after-tax returns are not worth the effort.
Taxes are the ultimate self-interest
But forget the economic theories, and instead consider the very personal impact proposed new taxes could have on your life and that of your children.
—The estate tax: Currently inheritances over $11.7 million (including the value of gifts made over your lifetime) are taxed at a rate that very quickly rises to 40% on amounts above that limit. (Note: Spouses can pass an unlimited amount to each other, and many states levy an additional form of inheritance tax.) Current proposals include lowering that exemption to $3.5 million.
Now, consider the totality of your “estate.” It includes your home, your retirement accounts, the value of any family business or farm — and even the face value of your life insurance if you own it! With the stock market at record highs, along with home prices, lower limits could put many families at risk of owing death taxes.
—The step-up basis: Currently when you die, your heirs inherit your stocks (outside a retirement plan) and your home, and the value of any other assets such as a farm or business, with a new cost basis as of the date of your death. Any gains when they sell those assets in the future are currently taxed with the value on the date of death as a starting point.
Proposals to remove the step-up basis mean that the home you or your parents purchased for $75,000 in 1973, will retain that cost basis when you sell it for $1 million! Similar impacts come from stocks purchased years ago. And they’re pushing those capital gains tax rates higher, too!
—A wealth tax: Review the history of the income tax. “Wealth” is in the eye of the beholder — and the hands of the lawmaker!
America has always been a beacon of opportunity for those who wanted to make money. Along the way, they have created jobs and opportunities for millions of others. Before you decide to impact those incentives, consider the real cost for yourself and your children. That’s the Savage Truth.