Redrick Terry:
It is time now for 4 Your Money. We are joined by James Nelson, financial advisor at NelsonCorp Wealth Management. James, welcome back.
James Nelson:
Thanks, Redrick. Good to be here.
Redrick Terry:
Absolutely. So, we are just a couple of days away from what would normally be the federal tax filing deadline. What are some of the recent changes that have been enacted?
James Nelson:
Yeah. So, I mean, it’s hard to keep up with all the changes we’ve seen in the last couple of years, but we’ve got a graphic here that I think summarizes the big changes coming down the line, and the first one is the deadline’s been extended to May 17th. So, similar to last year. Last year it was a little bit longer deadline, but we picked up a little time there. The second thing is the direct stimulus payments are not taxable. They are reportable, but they’re not taxable. That’s a change that we haven’t seen in the past.
James Nelson:
The unemployment is not taxable. That’s been a big item with all the additional unemployment benefits that have gone out this year. Unemployment is not taxable. The first $10,200 of unemployment per individual is excluded from gross income, and then the final one is the PPP loans. Those are what helped a lot of small businesses. Those expenses paid with money from the PPP are deductible. There was a lot of question there early when this program came out of how that was going to be handled, which then makes the forgivable loans basically tax-free. So, those are the highlights. Those are the big things that people should be aware of.
Redrick Terry:
And obviously, a lot of those changes are meant to provide relief to taxpayers who’ve been impacted by the pandemic. What kind of impact do you think this could have on taxes going forward once this crisis, of course, is behind us?
James Nelson:
Yeah. So, I think most people’s hope and expectation is with all of this government intervention, all of this stimulus money, that hopefully gets the economy back on track, and then tax revenue can go back up to pre-COVID levels. That would be the hope. But unfortunately, along the way, with all of this stimulus, we as a country have kind of dug ourselves a little bit of a hole. We spent $6 trillion in stimulus in one form or another through this transition, and that’s been a little bit of a drag.
James Nelson:
So, we are expecting tax rates to go up. This stimulus is going to have to be paid for one way or another. So, it would be our expectations that tax rates probably go up. Probably higher corporate tax rate. We’re at 21% right now. That probably goes up. Individuals, the higher earners, are probably going to be paying a little bit more. And then we’re also probably going to see a change as far as the capital gain rate and the step-up in basis. That affects more on the investment side of things. We could easily see those changes coming down the pipe.
Redrick Terry:
So, are the things that people could do to better position themselves in the event that taxes do go up in the future?
James Nelson:
Yeah. So, I think the first one would be considering some Roth conversions. If it’s an individual’s expectation like it is ours that tax rates are going to go up, it may make sense to convert some money. That means voluntarily pay some tax today to get money over into a tax-free world going forward. That would be one thing if your expectation is rates are going up. The other thing is potentially gifting some money. Folks that have a larger estate and are worried about inheritance tax, those rules could also change pretty quickly, so maybe gifting some money, repositioning assets now in the old system before the rules potentially change here in the near future would be a few things to consider. Then, the last thing again, the capital gain rates and step-up in basis that impacts investments along with real estate, farmland, all of those things kind of get pulled into this. So, evaluating properties, evaluating investments, and maybe doing some proactive planning yet this year. Maybe a good idea.
Redrick Terry:
Good advice as always. James, thanks for being with us today.
James Nelson:
Yeah. Thanks, Redrick. Good to be here.
Redrick Terry:
Absolutely. So, if you missed any part of our discussion, we will make it available to you at OurQuadCities.com.