As I write this on Wednesday, September 8 – just past midnight, that’s how writers roll – the best estimate I can get on when Congress will vote on the FY22 budget is ‘sometime next week’.
You’ve been reading about President Joe Biden’s proposals to tax wealthy citizens since this time last year. I know, because I’ve been writing about it, two or three times a month, since before the campaign. It’s been driving me nuts, this waiting… last week, I wrote of the agony of suspense, how I wished they’d just pass the tax measures so we can respond.
Lament with me, readers; I’m soon to be granted my wish.
Let’s recap: last week, House Democrats passed a $3.5 billion budget resolution. Procedurally, once the law is written – a tough process, even with a Congressional majority – the budget reconciliation process, chosen for the vote, can assure passage without a single Republican assenting. This time, the Democrats needn’t fear their cross-aisle opponents.
No; the problem is coming from the Democrats’ own ranks.
The arena of conflict is the Senate. The main agitator is Senator Joe Manchin (D-W.Va.), who doesn’t reject the bill’s objectives or attendant tax increases to fund it. It’s rather the size of the legislation. At $3.5 trillion, Budget 2022 will break our stratospheric spending records – when it comes to federal expenditures, the US remains Number One.
Senator Manchin stirred the pot last week via an op-ed in the Wall Street Journal, saying he wouldn’t vote for the budget “without greater clarity about why Congress chooses to ignore the serious effects inflation and debt have on existing government programs.”
President Biden seems confident Manchin will relent, and the budget will become part of history. Joe has set two priorities for September: manhandling the pandemic into control; and “passing my economic agenda so that we can keep up the historic momentum we’ve been building.”
Whatever that means; I’m fundamentally a moderate and like reasoned steps, taken slowly with due care. Friends have asked over the years: why don’t you run for office? I take that to mean: you’re an opinionated loudmouth, why not inflict it on a broader audience, and leave us alone?
Alas, I don’t have the stomach for bold steps; the word ‘momentum’ gives me vertigo. I wouldn’t fit into the Congress, these days.
Biden believes his spending plans will create swell jobs for average citizens. Senator Manchin, a moderate himself who sounds like a nice dining partner, unlikely to say anything to upset my digestion, fears inflation and debt will kill jobs, and millstone our future.
Manchin warns that the “Social Security and Medicare Trustees have sounded the alarm that these life-saving programs will be insolvent and benefits could start to be reduced as soon as 2026 for Medicare and 2033… for Social Security.”
Just yesterday, I was contemplating my retirement benefits, bemoaning their paucity, and thought, hopefully: maybe in few years, Congress will boost them. Reading his words, my white hair nearly turned to a mist.
The White House is sanguine; they say Manchin is troublesome, a meddlesome force, yet he always comes around to the party’s position. White House chief of staff Ron Klain calls Manchin “very persuadable.” Cedric Richmond, another advisor at 1600 Penn Ave., says we’re merely seeing “the sausage-making process at the end.” Stomach-wrenching, yes, but a tasty banquet is sure to follow, he thinks.
Yes, the budget will pass, and taxes will rise on the wealthy to pay for a whirlwind of spending. Last week, I listed the tax hike plans and their likelihood of passage. Let’s consider them again and examine ways to respond in the slim window left open to us.
The top marginal income tax rate will probably rise to 39.6% for people making more than $400,000 per year. To prepare, you can accelerate deductions to minimize your tax liability; many of us are already in lower tax brackets after the pandemic-driven downturn. Roth IRA conversions also make sense, as they have substantial tax advantages over regular IRAs.
The capital gains tax could nearly double to 39.6% – that’s one proposal; the final rate may be a notch lower. We’ve already seen some panic asset selling, but I don’t recommend it, unless you urgently need money. It might be better to hold off and see how things shake out.
I left out one item last week: the deductions cap. Many deductions, including charitable, IRA and 401(k) contributions, may no longer be fully deductible for taxpayers who pay the top rate. Response: boost your retirement plan contributions to their limit this year and talk to a planner if you’re considering substantial charitable giving. They can suggest wily stratagems to help.
Next on the kill list is the step-up in basis at death. Congressional Democrats would likely be proud to get this one passed, but as I’ve warned, enforcement might prove unworkable. They don’t listen to me, so plan for their worst. Response: if you have already established a trust, have your planning team see if adjusting it to allow for asset swaps would provide some taxation protection.
The estate and gift tax exemption, now $11.7 million, will drop to $5 million, or in the ugly scenario, to $3.5 million. Few pay this tax today, but it could soon become a commonplace problem for affluent families. Make lifetime gifts to your heirs right away, if you can. If anyone balks, sell it by saying they can skip the will’s reading – a dreary old chore, checked off the list. Inheritors must learn to be grateful.
President Trump, the noisome champion of the sickeningly rich – as some still say in Congress – slapped a cap on the state and local tax, or SALT, deduction of $10,000. That may be revoked, providing relief to wealthy taxpayers domiciled in states with noxiously high taxes. Hardly a silver lining, but in tough times – read, soon to be costly – we take solace where it is found.