Harris Tax Proposal (part 1)

Harris Tax Proposal (part 1)

????????????? The latest thing that the financial space is up in arms about is the Kamala Harris Tax Plan. Let’s look at a couple of the proposals and see if it is worth it to get worried.

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1.????? 25% minimum tax rate (net worth over $100 million:

Generally people with $100+ million net worth are going to be generating millions of dollars in income from: dividends, interest, capital gains, rental income, and business income.? The current tax charts (IRS.gov) show, for people that are married filing a joint return, “taxable income” would be at 32% over $362,200, 35% over $462,500, 37% over $694,750. Let’s look at an example.

MARRIED FILING JOINT:

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Let’s look at some examples (assuming no other income):

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Scenario 1: ?Mr. Richguy has a net worth of $100mm and has it all invested in 30 year TREASURY BONDS with a 4% coupon. Each year he will be collecting interest income of $4mm. This will be taxed as ordinary income around $1.4mm. The effective tax rate would be approximately 35.9%.

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Scenario 2: Mr. Richguy has a net worth of $100mm and has it all invested in an S&P 500 index fund which has a dividend yield of 1.25%. Each year he will be collecting dividends of $1,250,000. This will be taxed as qualified dividends around $297,500. The tax rate would 23.8% (20% long term capital gains rate + 3.8% net investment income)

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Scenario 3: Mr. Richguy has a net worth of $100mm and has it all invested in 30 year Municipal bonds paying 3.60%. Each year he will be collecting $3.6mm. He will pay $0.00 in taxes assuming the municipal bonds are not subject to AMT. The effective tax rate would be 0%.

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Rental Income and business income are a little bit harder to break down because there are a lot of moving parts including cash expenses (renovations, property management, salaries, etc.)? and non-cash expenses (depreciation, amortization, etc.). We will leave these on the side for now.

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Conclusion:

1.????? This is only a potential problem for people with a net worth over $100 million

2.????? The only investment that seems to be negatively impacted is municipal bonds. Slapping a 25% tax rate on municipal bond income will make the 30 Year Treasury Bond roughly equivalent (based on Tax Equivalent Yield). Corporate Bonds and Government Agency Bonds would be much more attractive.?

3.????? This is only a potential problem for people with a net worth over $100 million

4.????? I will venture a guess that this will have a negative impact on business and rental income if the adjustments looked at the gross income generated before any cash and non-cash expenses.?

5.????? Taxation of unrealized capital gains will be addressed in part 2

6.????? Did I mention that this is only a potential problem for people with a net worth over $100 million

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These hypothetical examples are for illustration purposes only. NEXT Financial Group, Inc. does not provide tax or legal advice. For such guidance, please consult your tax or legal professional. Feel free to contact me with questions.