Stealth Taxes | What is a Stealth Tax?

A Stealth Tax is a tax levied in such a way that is mostly unnoticed, or not recognized as a tax. Some examples of Stealth Tax are The Secure Act and The Widow’s Penalty Tax. Attorney and Advisor Chris Berry discusses Stealth Tax in this episode of Daily Wisdom.

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Episode Transcript

Stealth Tax

Hey, this is Chris Berry with Castle Wealth Group and today we’re going to talk about stealth taxes and if you like this information, please make sure to subscribe to our YouTube channel and comment on the video.

Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications, such as Forbes, Kiplinger’s Crain’s Detroit, and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning and has authored the Amazon best selling book The Caregiver’s Legal Guide.

What is a stealth tax? Well, we have tax changes that are raising taxes on its face. So, one example of this is the repeal of the Tax Cuts and Jobs Act. In 2018, the Tax Cuts and Jobs Act was passed and was supposed to run from 2018 to 2025. Well, what the Tax Cuts and Jobs Act does is lowers marginal tax rates across the board. Right now we’re at a 12% tax rate, when the Tax Cuts and Jobs Act expires that 12% tax rates jumping up to 15. Your 22% tax bracket’s jumping up to 25 or 28. By repealing the Tax Cuts and Jobs Act that’s on its face, raising marginal tax brackets. That’s an example of a very straightforward tax rates.

Now, let’s talk about stealth taxes. And so we’re going to start working backwards. When you pass away, what are some examples of stealth taxes? Well, we have one right now and we have what’s called The Secure Act. The Secure Act passed in 2020 and what The Secure Act says is that if you leave pretax money to the next generation, instead of them being able to stretch it out over their lifetime, the taxes, now they have to pay all the taxes within 10 years. It’s not necessarily raising your tax rates, but it’s compressing the window when your beneficiaries can pay tax, which will in effect, raise their tax rates. That’s an example of a stealth tax. They’re sneaking it past the American public and saying, “Hey, I’m not raising taxes.” Technically that’s true but in essence, they are. That’s one example is The Secure Act that recently passed.


Step-up in Basis

Another example of a stealth tax, and this is proposed is they may be getting rid of what’s called Step-up in Basis. When someone passes away, depending on how they pass assets to the next generation, the beneficiaries make it a step-up in that basis. If you bought something for 100,000, you die, it’s valued at 200, and then you sell it and then your kids sell it for 210, they get a Step-up in Basis where now they just have to pay the gains on the 200 to the 210. They don’t have to pay on the gains from the 100 to the 210, because of Step-up in Basis. Well, Biden has ran on a proposal of getting rid of that Step-up in Basis, so now if you were to pass away taxable accounts, with investments, with real estate, you bought it for 100, your kids sell it upon death for 210, they’re going to have $110,000 worth of capital gains they’re going to have to account for. That’s an example of a stealth tax.

Now, another example of this is what I call the Widow’s Penalty. When we have a married couple, you have a married filing jointly tax bracket, so a wider tax bracket. Well guess what? When one spouse passes away, typically the income needs and the expenses are relatively the same, but now the tax bracket is basically cut in half. Where if that surviving spouse has to pull money out of the IRAs, out of the 401ks, has social security coming in, has a pension, now they’re going to get taxed, maybe even double on that income. That’s another example of a stealth tax.

Understand that politicians and the government, they pass explicit tax raises, and we may be seeing some of those based on the pandemic, the fact that we’re $30 trillion in debt, but really they do spend a lot of time on these stealth tax races. The Secure Act they passed in 2020, the media was focusing on pushing back your required minimum distribution ages from 70 1/2 to 72, that’s not why government passed this. They passed this to get the stealth facts moved in where now they’re going to limit the stretch of the IRAs. Likewise, back in the 80’s, the tax on social security, that was a little bit of a stealth tax, a lot of people didn’t realize that. Prior to the 80’s, their social security was never taxed. I see the government doing a lot more of these stealth taxes, and this is why you need to stay up on tax planning.

Hopefully this has been helpful. This has been Chris Berry with Castle Wealth Group. If you like this video, please comment. Make sure to subscribe to the YouTube channel. Thank you so much.

Castle Wealth Group has clients across the nation and helps them [inaudible 00:04:58] plan, protect and preserve what is important by creating a retirement and legacy blueprint.



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