Andy Friedman, founder and principal of The Washington
Update, says a tax bill “has to get wrapped up” this year and warns that “tax
increases can spook the markets.”
In a recent interview with ThinkAdvisor, Friedman — who
develops the content for The Washington Update and whom CNBC calls “one of
Washington’s savviest political observers” — weighs in on what advisors should
be doing now to help their clients brace for tax increases.
No stranger to helping clients navigate taxes, Friedman was
tax counsel to Major League Baseball, the National Football League, the
National Basketball Association and the National Hockey League.
He’s still a baseball fan. “You have to go to baseball
games,” Friedman enthused.
Also under his belt: nearly 30 years as a senior partner
with the law firm Covington & Burling in Washington, where he was head of
the tax and corporate groups. Friedman received his law degree from the Harvard
Law School.
On Biden’s Tax Hike Plans
“From a market perspective, the concern has to be that the
tax increases can spook the markets. And I think those tax increases are going
to morph as they go through Congress so there’ll be ongoing volatility as we
see each change. But, keep in mind that the tax increases are going to
accompany stimulus that is much greater than the tax increases themselves.”
He continued: “If you look at say, the infrastructure bill,
the spending is over 8 years, but the tax increases are over 15 years, which
means the amount of stimulus going into the economy is going to be greater than
the tax increase. I think a negative reaction may be overwrought and that the
markets will come to realize there’s a lot of stimulus here.”
What Advisors Should Do
“What advisors have to do is be active,” Friedman said. “I
don’t accept this word ‘proactive,’ in planning for these increases. Keep in
mind that a capital gains increase, we may not know of the effective date. It
may make sense to take actions, like on the capital gains. If there’s assets
you’re thinking of selling, let’s move up on that. If there are assets that you
want to keep you can repurchase them immediately — the wash sale rule doesn’t
apply to gains.”
As Friedman explained, the wash sale rule says “that if you
sell a stock at a loss, you can’t turn around and buy that stock back right
away, because you really haven’t sold it. You have to wait 30 days between you
sell the stock at a loss and when you buy it back.”
Bottom line: “You have to prepare” for tax increases. There
are a number of options that can be considered, he continued, like Roth
conversions, accelerating deductions, donating property to charity.
“Rather than sit there worried, this is actually an
opportunity to talk with clients about taking steps to mitigate the
consequences of these tax increases.”
Clock Is Ticking
While this year is all about Biden’s push to increases taxes
and “mitigating the consequences of that tax legislation,” next year “you’re
going to see a complete shift.”
Tax legislation has “gotta happen this year” as next year
“we’re in an election year; then we’re at the midterms when Democrats could
lose Congress.”
As it stands now, Biden has two proposals. “One is
infrastructure funded by corporate tax increases and one is the more social
program changes funded by individual tax increases,” Friedman explained. “It
seems inevitable to me that the tax increases get put together in a single bill
under infrastructure and some items in the second bill, The American Families
Plan, get incorporated into the single bill and that goes through under
reconciliation. I don’t know why you would go through this twice.”
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