How to advise clients on tax code changes

THere are potential tax code changes that could result in higher taxes for Americans with the highest gross incomes as well as changes in capital gains, but the best solution is to advise clients to get by, blogged Mark Hackett, Head of Investment Research for Nationwide’s Investment Management Group.

The “Build Back Better” bill proposes to increase taxes by 5% on those with an annual income above $ 10 million and an additional 3% beyond that on anything over $ 25 million; the surtax would apply to dividends, capital gains and salaries. The bill has already passed the House and is currently in the Senate, where it may have been amended or simply did not pass.

A recent Nationwide study found that concerns about taxes have doubled since 2020 for investors and tripled for those with higher incomes (between $ 1 million and $ 5 million) over the same period.

Historically, Hackett explains that there has been little or no correlation between changes in market returns and adjustments in capital gains rates.

“In a Tax Foundation analysis, there have been 22 changes to the maximum capital gains tax rate since 1954. In the years that capital gains tax rates have changed, the correlation with capital gains in stocks was almost indistinguishable at 0.004, “he wrote.

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As such, the best advice a financial advisor can give their client is to just sit back and not make big changes, even if the tax code changes. Changes to things like the tax rate or capital gains taxes often make investors feel the need to react in one way or another within their portfolios, but everything This change could ultimately be counterproductive for the portfolio and add to the market disruptions that could arise around an announcement of a tax code change.

“Making emotional decisions in portfolios based on tax changes can hurt long-term returns,” Hackett wrote, and cautioned that advisers should instead orient their clients towards their long-term goals and plans instead of focus on the immediate tax changes that most likely will be. does not affect their wallet.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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