Monthly Economic News
Monthly Economic News
The American Jobs Plan
INVESTMENT COMMITTEE COMMENTARY APRIL 2021
Investment performance was positive in April as the U.S. economy continued to rebound. Central bank accommodation, consumer confidence and decreasing weekly jobless claims supported equity markets. Major stock indexes reached all-time highs during the month and closed April near those highs. Corporate earnings are one factor fueling the strong markets. S&P 500 operating earnings per share (EPS) declined during the pandemic from $157.12 to $122.37. In 2021, earnings are expected to grow significantly. S&P Dow Jones expects trailing 12-month earnings of $148.66 in March with $183.52 estimated by year end.
The yield on 10-year Treasuries fell from 1.74% to 1.65% during April. With generally falling yields, bonds had modest positive performance during the month. Bond yields are expected to remain low for now, but there is a risk of increased inflation.
Outlook for President Biden’s Tax Proposal
To pay for new and expanded government programs as outlined in President Biden’s address to a joint session of Congress on April 28, 2021, Biden proposed The American Jobs Plan. This plan includes some of the following provisions:
- An increase in the top income tax rate from the current 37.0% to a proposed 39.6% for joint filers with $628,300 of income, and for single filers with $523,600 of income. This a return to the top tax rate before the 2017 Tax Cuts and Jobs Act.
- For taxpayers with income over $1 million, the proposal would raise the top tax rate on capital gains and dividends from 23.8% to 43.4%. If passed, it would be the first time distributions from IRAs are taxed at a lower rate than capital gains and could impact asset location strategies for some clients.
- The carried interest ‘loopholes’ that potentially benefitted partners of private equity and hedge funds would be eliminated, resulting in this type of income being taxed at ordinary income tax rates.
- Biden indicated that filers making less than $400,000 annually would not pay any more in taxes and would continue to pay taxes at the current tax rates.
- Biden proposed additional governmental resources to be allocated to the IRS for an increase in IRS examinations and enforcement of taxpayers making more than $400,000 in income.
- The federal corporate tax rate would be raised from 21% to 28%, a 15% minimum tax on “book profits” would be established, and the minimum tax on select overseas profits would increase from 10.5% to 21%.
- Separately, under Biden’s American Families Plan, for estate tax purposes, step-up basis at death would be eliminated on gains of more than $2 million for joint filers, and $1 million for single filers. Biden also proposed to increase the 2021 estate tax rate of 40% for estates above the exemption amount. Notably, the current estate and gift tax exemption amount is not changed under the Biden proposal and would remain at the current level of $11.7 million per person, indexed to inflation.
The proposal highlights the need to plan carefully and run the math before making any snap decisions. The decision to sell now or hold appreciating assets at a greater tax cost depends on when someone needs the money. Also, tax rates may change again.
We want to emphasize this is only a proposal. Congress may not adopt the plan and changes are likely to be made. Therefore, JMG is not recommending any investment changes based solely on tax proposals. We will continue to monitor the actual provisions that may get implemented.
If you have any questions, please contact your JMG advisor.
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