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September 20, 2021

As predicted, the next agenda for the Biden Administration is Fiscal, i.e., Taxes. The House Democrats are starting to draft $2.9 Trillion in tax provisions to pay for the $3.5 Trillion that is targeted for “infrastructure” spend. 

We are still a long way from any form of agreement. The Democrats have enough votes to get passage if everyone votes on party lines, however, as is always the case, there are factions, and this will need to be discussed and negotiated before it can be presented to the floor. Quick history note—under the constitution, all tax bills need to originate in the House of Representatives. Once passed by the House, the bill goes to the Senate. More often than not, it gets “mark ups” and amendments. Hearings are held, and eventually the new marked up version will get sent back to the House for further discussion. The Senate can just kill a bill and the whole process would need to start again. 

I tell you this for two reasons:

1.  We will hear a lot about this in the coming weeks and months. It will dominate headlines and be the focus of water cooler discussion for weeks to come.

 2.  More importantly, the market has already priced this in. Remember if you’ve read it, heard it, or watched it on TV, it’s already priced in the market. I would argue that this has been priced in the market for 6 months or more. We all knew based on what was debated through the campaigns that Democrats would try to lift the tax rates, for corporations as well as top end individuals. There will always be a wide-reaching faction of either party that will get some airtime and throw out some ridiculous proposal that will grab a headline, but don’t let that distract you from the big picture.

It all comes back to earnings and our longer-term estimates have a 3-5% reduction of corporate earnings based on an increased corporate tax rate. 

With that, let’s look at some “realistic” proposals that are being discussed right now.

Corporate Tax Modifications

Graduated corporate tax with higher top rate

● 18% rate for income up to $400K; 21% rate for income $400K-$5M; 26.5% rate for income $5M and above.

● Graduated taxation phased out for income above $10M with surtax lesser of 3% of excess or $287,000.

● Personal service corporations not eligible for graduated rates and pay 26.5% on all income.

International tax adjustments

● Foreign Derived Intangible Income (FDII) effective rate raised to 20.7% (from 13.125%). The Biden administration proposed repealing FDII.

● Global Intangible Low Tax Income (GILTI) effective rate raised to 16.5625% and calculated country by country, up from 10.5% globally. Original

Biden proposal targeted rate of 21-26.25%.

● Base Erosion and Anti-Abuse Tax (BEAT) raised from 10% to 12.5%, rising to 15% after 2025. Biden’s proposal initially repealed BEAT for newly developed

minimum tax framework.

Limitation on REIT income test under Section 856

● Rents from prison facilities not treated as qualified income for REIT income test purposes.

Individual Tax Modifications

Higher top marginal income tax rate

● Top income tax rate raised to 39.6% from 37% on income over $400K for individuals, $450K for couples.

Higher capital gains rate

● Top capital gains rate raised to 25% from 20% – 28.8% applying net investment income tax (NIIT)

● Higher rate effective as of September 13, 2021, but with blended rate. Transactions made prior to this date would fall under previous rates,

and transactions after this date would fall under new rate. Gains realized from transactions entered into prior to this date will apply existing

rates. Only transactions started and realized after September 13, 2021 would have higher rate applied. This will require transitional regulation

from the IRS to fully operationalize.

● Income levels for new rate appear to apply to existing IRS rules, and not to incomes above $1M as initially introduced under Biden plans.

New surtax on income over $5M

● A 3% surtax is applied to modified adjusted gross income above $5M, applying to trusts and estates.

Limited qualified business income deduction (199A)

● Maximum 199A deduction set at $400k for individual and $500k for joint returns.

Elimination of excess business loss deduction

● Excess business loss deductions for non-corporate taxpayers are eliminated. Losses eliminated are allowed to be carried forward to next

taxable year.

Phase out of higher estate and gift tax exemption

● The higher exemption of $11.7M due to phase out after 2025 is reverted to $5.85M, indexed for inflation.

Increase in estate tax valuation limitation for family farms or businesses

● Allowable reduction for real property raised from $750,000 to $11,700,000.

Retirement Plan Modifications

Elimination of Roth conversions

● Roth conversions for traditional IRAs and employer-sponsored plans are eliminated for individual incomes over $400K/ joint filers over $450K.

● Applies to distributions, transfers, and contributions made after 2031.

Prohibition of after-tax contribution/conversion

● Employee after-tax contributions in qualified plans are prohibited.

● Prohibits after-tax IRA contribution converted to Roth regardless of income level, effective 2022.

Restricted IRA/defined benefit plan contributions

● IRA/defined contribution accounts with balances above $10M held by individuals with taxable income above $400K are restricted from further


Minimum required distributions for accounts

● Minimum distributions required the following taxable year if aggregate IRA, Roth IRA, and defined contribution balances exceed $10M for

account holders with income $400K+.

● Distribution is 50% of amount in excess of $10M.

● Additional rules for accounts exceeding $20M.

Prohibition of IRA asset investment in entities with owner interest

● Prevents IRA investment in entities (corporations, partnerships, trusts, or estates) in which individual has 50 percent or greater interest.

● Adjusted to 10 percent for investments that are not tradable on a securities market.

● Two year transition period for IRAs holding such investments.


Acceleration of executive compensation deduction limitations

● Effective date of $1 million deduction limit for compensation paid to firm officers moved up to 2022 from 2026.

Tightened rules on digital assets/cryptocurrencies

● Constructive sale rules and wash sale rules expanded to cryptocurrency and digital asset transactions.

Increased tobacco and nicotine product taxes

● Excise tax on smoked tobacco products doubled.

● Smokeless tobacco tax also increased.

● Excise tobacco tax applied to “extracted, concentrated, or synthesized” products.

Source: Raymond James

Remember, this is no where near a done deal, and it’s likely to move a few different directions. Lastly, I will tell you that a lot of these bullet points, are included to help pay for things today that will likely never end up happening. It’s not uncommon to have a law change today that won’t take affect for 10 years or more, simply to make the current budget balance. E.g., A change in the estate tax law that takes affect to 10 years, will save $1 Trillion over 20 years, can be put into a bill today to assist the deficit spend. You gotta love accounting.

With that said, here is the Buy Sell. Shorter term we are bouncing around the 50-day moving average on the S&P 500 so we will see if that holds here as it has done the previous 9 times this year. Sooner or later we will get a 5+% pullback. That will be our opportunity for the next leg higher.

Mick Graham, CPM®, AIF®

Financial Advisor/Branch Manager Raymond James Melbourne, FL

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

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