Andy Friedman: 9 Ways Advisors Can Prep Clients for Tax Hikes

What You Need to Know

Higher inflation will take hold in the U.S. due to the Russia-Ukraine war, Friedman says.
He predicts some of the tax increases in Biden’s Build Back Better plan will be enacted, taking effect in 2023.

Higher inflation due to the Russia-Ukraine war along with likely tax hikes are on tap for the United States, according to Andy Friedman, founder and principal of The Washington Update. Meanwhile, tax hikes are likely to be passed before the midterm elections in November, he says.

In a webcast held Thursday by American Century Investments, the political analyst and former tax attorney discussed the financial impact of the war and offered planning strategies advisors can use to help clients prepare for potential tax increases.

The Russia-Ukraine war will cause a spike in oil and food prices in the United States resulting in “increased inflation on top of the inflation we already have,” Friedman said on the webcast.

More inflation presents “a conundrum” for the Federal Reserve Board: it “will want on the one hand to increase interest rates to tame inflation but on the other hand it will want to keep rates low to spur an economy that is likely to slow down as a result of the inflation and the effects on the world markets. And all of that is going to lead to increased market uncertainty.”

Congress, Friedman added in a separate email to ThinkAdvisor on Monday, “has a lot on its plate now: government funding (by March 11); COMPETES Act (supporting domestic chip manufacture); [Electoral] Count Act (formalizing the electoral count process); the Supreme Court nomination; and a possible gas tax holiday.”

President Joe Biden’s Build Back Better plan, he said, “has fallen lower in priority.”

The gas tax is 18.4 cents per gallon. There’s “talk about relieving that tax through the end of 2022,” according to Friedman.

As for potential tax increases, Friedman opined that some parts of the Build Back Better legislation will pass.

“I continue to think that the Democratic leadership wants to pass at least some items in BBB before the [midterm] election,” he said in the email. “The bill likely will include items Sen. [Joe] Manchin once indicated that he might support, such as universal pre-K, expanding health insurance coverage, clean energy, and drug pricing. The bill will incorporate tax increases so that there is no revenue loss. The tax portion of the bill might also include other policy items, such as limits on IRA holdings.”

“First thing that probably hits us the most is an increases in tax rates,” he said.

Manchin, D-W.Va., supports an increase in the individual tax rate from 37% to 39.6%, the capital gains rate from 20% to 28%, and the corporate tax rate from 21% to 25%, as well a 15% minimum tax on corporations, Friedman said.

Others in Congress, particularly Sen. Kyrsten Sinema, D-Ariz., are looking at surtaxes on very high income families.

“So there would be a 5% surtax for families with income over $10 million and an additional 3% surtax, for a total of 8%, on families [with] over $25 million” in income.