Democrats and President Biden are knee-deep in the political act of horse-trading and arm-twisting. It’s sausage-making at its worst. In the end, most Americans will find the result downright tasty. For the wealthiest among us, it’ll no doubt cause some financial indigestion.

In exchange for the extension of the new bulked up child tax credits, a broadening of childcare tax benefits, the expansion of Medicare benefits along with the introduction of free community college, paid sick leave and universal pre-K, a slew of tax changes are on the table.

In keeping with Biden’s election promise, most of the proposed tax hikes for individuals will only affect people who make more than $400,000 to $500,000 per year. To loosely paraphrase the famous bank robber, Willie Sutton, this is where a lot of the money is and, conveniently, where most of the voters aren’t.

To start, the top tax bracket would be about 3% higher than it is today, returning it to the familiar 39.6% level. This proposal not only increases the top tax rate, it would kick in at a lower income threshold.

Next, high-earning business owners who use S-Corps to split their earnings as partly “wage income” and partly “business profit” may face an extra 3.8% tax on the portion they choose to classify as business profit. This proposed change partially closes a loophole that helps them avoid paying Medicare taxes.

Also on the docket is a tax hike on long-term capital gains. The proposal would raise this tax to 25% from the current level of 20%. Once again, this would only affect those making over about $500,000 per year. An earlier proposal to capture capital gains taxes on inherited assets appears to have been abandoned, for now.

Rounding out the tax changes for high earners is a new 3% “surcharge” on income that exceeds $5 million as well as a slew of limitations placed on massive IRA balances above $10 million. Finally, certain Roth conversion strategies may also be a thing of the past (although some come after a 10 year delay!)

Beyond these proposed tax changes for individuals, Congress is also focused on reversing some of the corporate tax cuts introduced in 2018.

Under current proposals, the top corporate tax rate for businesses structured as C-Corps would rise from the 21% rate to around 26%. Prior to the Trump tax cuts, the top rate for big businesses was once 35%, so this change only represents a partial reversal of tax policy.

Finally, for certain business owners who conduct their activities through pass-through entities – such as S-Corps or LLCs – the lucrative 20% business income deduction will fade away if they make more than $5 million in profits.

Just as sausage-making is a notoriously unappetizing thing to watch, over the coming weeks Congress looks poised to grind out an ugly legislative process. Frankly, if it wasn’t my job to watch it all closely, I’d simply choose to avert my eyes!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Investors are experiencing an unnaturally profitable period. The S&P 500 index has gained about 18% so far in 2021. And, as a reminder, this follows a similar 18% return in 2020 and the 30% surge in 2019. That’s over 80% in less than three years. After such a run, prudence really should be the order of the day.

With this run in stocks – and, let’s be honest, it feels inexplicable amidst such economic upheaval – now is a wise time to review your investment portfolio within the context of your longer-term plan. Every so often, it’s smart to take a step back and formally assess where things currently stand relative to your original plan.

There are only a few truly important rules to follow in investing. Beyond proper diversification and sticking with low-cost investments, the most important factor is your portfolio’s asset allocation.

To review, the concept of asset allocation is about finding the right mix between riskier and steadier investments. Studies have shown that your portfolio’s allocation between stocks and bonds, not your individual selections, explains the vast majority of your portfolio’s return.

Do you know your portfolio’s current asset allocation? If not, that’s a good place to start your review. You might be surprised by how much your portfolio has drifted away from your original asset allocation target. Admittedly, rebalancing in the face of possible capital gains taxes can be a difficult and delicate task. But, it’s always best to focus on the dog (your portfolio), not the tail (your tax bill.)

Next is really knowing your life’s costs. If you want, you can call this your budget. I prefer to refer to it as your living cost summary. The word, budget, just has such a restrictive ring to it. On the other hand, your living cost summary is a comprehensive tally of where you’re choosing to spend your money. That sounds much easier to stomach.

Do you know the cost of your lifestyle? Having created retirement-readiness models for over two decades, I can assure you that your spending habits will make or break your plan. Of course, as opposed to banking on a higher level of investment returns, your spending is the far more controllable and predictable piece of the puzzle.

Developing a formal retirement income model shouldn’t be seen as rocket science or feel overly painful. Thanks to today’s sophisticated financial planning software, these models have become more robust, flexible and useful over the years. At its very core, though, it’s still all about comparing your income and expenses, year-by-year, and then projecting things out over many decades and over many possible future scenarios.

Your formal financial plan really is the baseline against which all things should be measured. It’s at times like these, when markets seem almost too good to last, recalibrating both your portfolio’s asset allocation and assessing your spending against your original plan should move up your list of priorities. It might even allow you to overcome your natural sense of complacency just when things appear so unnaturally easy!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: We have two children (ages 3 and 5) and we’d really like to plan for the cost of college. Unlike us, our hope is to leave them with as little debt as possible. What would you recommend in terms of the amount to save and the type of account to use?

A: Your children are lucky to have parents who want to plan for their future. That’s not something they’ll recognize immediately. They will someday, probably!

Addressing the “how much” question is different for every family. Some parents hope to just pay for the cost of tuition, fees and books. Some want to provide for an in-state public university. And, others hope to pay the full cost of a private college or out-of-state university. Defining the exact goal is obviously the first step.

For an in-state, public university, the cost of tuition and books are about $15,000 per year. Room and board will run you another $10,000 per year, as a very rough estimate. So, for a four-year degree, that adds up to over $100,000. And, remember, these figures are measured in today’s dollars. Keeping pace with college cost inflation is a great reason to put away money early.

In your case, with about 14 short years until college starts, providing them with four years of college might require you to save about $8,000 to $10,000 per year for each child. If this level of saving isn’t possible within your budget – and, let’s be honest, it is not for most people – it’s fine to scale back your goals. Remember, scholarships, grants and student loans are all viable financing tools. We also have a very good community college here, too.

Now, once you’ve decided on the amount you can actually save, my recommendation is to use a 529 plan for each child. The State of Michigan’s plan is called the Michigan Education Savings Program. Go to www.misaves.com to read about it.

The investment earnings inside a 529 plan are not subject to any taxes as long as the money is eventually used for “qualified” education expenses. On top of this tax benefit, your savings can result in an immediate state tax break of up to $425 per year.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

As I wrote a few months ago, July 15th marks the start of something new. Automatic monthly government checks are coming to the bank accounts of millions of families with kids. But, without some deeper understanding of the new child tax credit, some may be in for an unpleasant surprise at tax time next year.

With Biden’s signing of the American Rescue Plan in early March, major changes were made to the tax credit families receive for having children. To put this into perspective, child tax credits are provided to about 90% of families with kids. It’s a truly far-reaching feature of our tax code.

Unless you really inspected your tax returns, the child tax credit used to operate silently in the background. The new child tax credit now has a much more visible role.

Prior to the American Rescue Plan, the child tax credit was $2,000 for each child under age 17 and $500 for full-time college students. Married filers with modified adjusted gross income below $400,000 received these tax discounts. For single and head-of-household filers, the eligible income threshold is cut in half.

Under the American Rescue Plan, there are two major changes.

First, the law introduced a new intermediate income threshold of $150,000 for married filers with kids. This first income threshold now operates alongside the higher $400,000 threshold. For people who make less than this lower threshold, the tax credit was also boosted to $3,000 for kids between age 6 and 17 and $3,600 for kids under age 6. For those earning between the first and second income threshold, the smaller $2,000 per kid tax credit still applies.

Second, the law introduced the concept of monthly checks. Starting on July 15, parents are going to receive automatic, monthly deposits into their bank account or mailbox. For families below the first, lower income threshold, they will now get monthly deposits of $250 to $300 for each of their children. Smaller monthly deposits will also arrive for those making between the first and second income thresholds.

Now, here’s the catch.

Unless Congress steps in, these monthly deposits will stop in January. And, perhaps more importantly, these are actually “advance payments” of the child tax credits. This part deserves a little more explanation.

In the past, child tax credits were received only at tax time. For many, they help to create big tax refunds. Many households plan on their tax refund to help pay for upcoming vacations or pay off old Christmas bills. Without the windfall created by the “all-at-once” child tax credits, tax refunds might look considerably smaller at tax time next year. In other words, the already-spent monthly deposits might result in an unpleasant cash flow surprise for millions of families.

Once started, automatic monthly checks are a tough thing to take away. I expect Congress to act soon to continue them into 2022 and beyond. If they don’t, millions of families might have to develop a plan to save some of the monthly checks to blunt the impact of next year’s smaller-than-usual tax refund.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com