< back to Market Insights Blog

Capitol Hill is producing more drama than Hollywood.

We’ve got bold statements, ultimatums, cliff-hangers, and confusing sequels.

We’ve even got folks paddling up to Senators’ party boats to discuss tax reform.

Let’s recap what we know with some educated speculation about what could happen next.

[Scroll down to the bottom for the nitty-gritty if you want to skip the details.]

Congress is currently debating two action items on President Biden’s “Build Back Better” agenda: The American Jobs Plan (which includes corporate tax increases) and the American Families Plan (which includes individual tax increases).¹

Neither plan looks close to passing in its current form, so nothing is set in stone yet.

But the provisions below offer a blueprint for what could happen.

The House is negotiating a package of tax increases that would pay for expanding Medicare, free community college and prekindergarten, and increase the federal safety net.²

If passed as-is, it would:

• Increase the top marginal income tax rate to 39.6% for individuals earning more than $400,000, joint filers above $450,000, and head of household filers above $425,000.
• Raise the top long-term capital gains rate from 20% to 25% for those same folks.
• Add a 3% tax on incomes of over $5 million.

But wait… there’s more. Here are a few other key provisions that bear watching:

Retirement accounts may see new restrictions.³

Roth conversions would be eliminated for individuals earning above $400,000.

Folks in that income bracket would also be prohibited from contributing to retirement accounts with an aggregate value over $10 million the prior tax year.

Another critical change that would affect all taxpayers: The bill prohibits all employee after-tax contributions to qualified plans and prohibits after-tax IRA contributions from being converted to Roth, thus potentially eliminating backdoor Roth conversion strategies.

Estate planning may get more complicated.³

Good news first: The “step-up” in tax basis on death is staying and the “deemed realization” rule that would trigger capital gains taxes on death is not included.

However, the estate tax exemption would revert from $11.7 to $5 million.

The deal would also eliminate certain tax benefits of “grantor trusts” as well as limit valuation discounts on non-business assets.

Currently, these provisions would apply only to future trusts and transactions that happen after the effective date of the law.

How likely are all these measures to pass?

Here’s where we start speculating.

To pass the American Families Plan using budget reconciliation, President Biden needs the votes from his entire party.

Progressives are committed to passing the full deal but centrists are balking at the price tag.¹

To get through the Senate, it seems like both sides will meet somewhere in the middle.

A lower final cost to the bill would require less revenue to cover and might allow some of the tax increases to be eliminated.

Since the IRS has been targeting Roth conversions and large IRAs, it’s possible that those measures may pass.

When could the new laws go into effect?

It seems likely that most provisions would be effective on January 1, 2022 and apply going forward (not retroactively). However, separate deadlines could be negotiated for certain provisions.

Bottom line: Laws change. We adapt.

Here are the usual caveats:

We don’t know what the final bills will look like and when (or if) they will pass.

Taxes are just one part of your overall picture.

New laws usually contain a mix of positive and negative changes for you, me, and everyone else.

The long-term impact of the positives and the negatives won’t be visible for some time.

Have questions you haven’t asked me or concerns you haven’t raised? Please reach out.

If I see moves that I’d like you to make before year-end, I’ll contact you directly.

Sincerely,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. I’m also keeping an eye on the debt ceiling debate happening right now. I’ll update you if it’s needed.

¹ https://www.cnbc.com/2021/10/04/schumer-aims-to-pass-biden-infrastructure-build-back-better-plans-in-october.html

² https://www.schwab.com/resource-center/insights/content/will-taxes-rise-wealthy-what-you-should-know

³ https://www.foley.com/en/insights/publications/2021/09/democrats-introduce-tax-proposals

​​This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.

< back to Market Insights Blog

The stock market got a little crazy this week.

Is a storm coming?

Let’s take a look at what’s driving markets right now.

(Scroll to the end if you just want my takeaways.)

A few things are driving the market volatility:

Fears of a financial crisis in China.

China’s overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt.¹

Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.

Worries the Federal Reserve will start tapering soon.

The Fed meets this month and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved.² Firms that depend on low interest rates and easy credit could be hurt.

Concerns about COVID-19 case numbers.

Variants continue to pop up and the delta variant continues to keep cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.³

Fears of another debt ceiling showdown.

Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.

Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinksmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.⁴

Do you see a trend? Markets are being driven by fear, anxiety, and doubt.

Which of these squalls will fade away and which could blow into a tempest?

We can’t know.

So, here’s the real question:

Goran, could we see a 10%+ correction in the weeks or months ahead?

Possibly.

Corrections and pullbacks happen regularly and it wouldn’t be surprising to see a market drop.

To show you just how ordinary corrections are, here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance.

(Take a look at the red circles to see the market drops each year.)

The big takeaway? In 14 of the last 20 years, markets have dropped at least 10%.⁵

Even years with strong performance saw big drops.

We’re dealing with a lot of uncertainty and investors are feeling understandably cautious about what’s ahead.

But, that doesn’t mean that we should panic and rush for the exits.

Pullbacks, corrections, and even downturns don’t last forever.

Trust the process. Trust the strategy.

I’m keeping an eye on the Chinese property market situation, as well as workings over in Washington. I can’t predict which way markets will go in the coming weeks, but I’ll be in touch as needed.

Have questions? Feeling uneasy? Please reach out. That’s what I’m here for.

Warmly,

Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
www.independentadvisorsnw.com

P.S. This email was originally going to be about updates to the tax legislation negotiations, but the market turmoil took precedence. I’ll be in touch on taxes when we know more about how the politics could play out.

P.P.S. Some folks handle stressful situations better than others. What helps you keep your cool when things get turbulent? I’d love to hear. Just hit “reply” and let me know.

¹https://www.cnbc.com/2021/09/17/china-developer-evergrande-debt-crisis-bond-default-and-investor-risks.html

²https://www.nbcnews.com/business/markets/dow-futures-tumble-more-600-points-september-slide-intensifies-n1279618

³https://www.cnbc.com/2021/09/19/stock-market-futures-open-to-close-news.html

⁴https://www.nytimes.com/2021/09/20/business/stock-market-federal-reserve.html

⁵https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

The following posts and commentary are to be used solely as educational tools and do not contain investment advice. Investment advice must be tailored to a particular investor’s specific needs. None of the information contained should be construed to be investment advice. Individuals wishing to tailor a plan to their own needs should seek the help of a Registered Investment Advisor.

There is a high degree of risk in investing and trading. Independent Investment Advisors assumes no responsibility. Principles of Independent Investment Advisors may, at times, maintain directly or indirectly, positions in securities or derivatives mentioned in these comments.