As the White House’s reconciliation package moves through Congress, morphing along the way, some of its provisions are already worrying investors who are concerned about potential tax impacts. The Build Back Better Act includes plans to strengthen the United States’ social safety net and widespread climate change initiatives, which will likely be paid for in part from a surtax placed on the country’s wealthiest individuals – particularly those with income levels at $10 and $25 million.
The result is that investors say taxes are one of their top concerns, according to Nationwide Retirement Institute’s Advisor Authority study, an annual dive into critical issues for financial professionals and investors. According to the report, investors’ tax worries have almost doubled since last year: 27% versus 15%.
It’ll come as no surprise that the more inventors are worth (specifically, those with household investable assets ranging from $1 million to less than $5 million), the more concerned they are about the tax implications of the new bill. Concerns about taxes for these high-net-worth individuals shows that it has almost tripled year-over-year from 2021 to 2020 (27% vs 9%). And for ultra high net worth investors (investable assets of $5 million or more), 32% say that taxes are also one of their top concerns, up from 26% from 2020.
Most Americans won’t feel tax hit
The tax implications may be daunting for a small slice of investors, but most Americans won’t feel much different come April 15, according to Nationwide.
“Under the current proposed reconciliation plan, income taxes would increase only for very high-income individuals—not most Americans,” says Eric Henderson, President of Nationwide Annuity.
However, for those likely to feel a higher tax burden from the bill, Henderson says that financial professionals will have a chance to provide clarity and navigate challenges for clients who may be “bracing for the worst.” He adds that investment vehicles such as life insurance and annuities can be useful tools for tax deferral and managing future taxes.
Advisors have concerns too, but play critical role
According to advisors and financial professionals who weighed in, 26% say taxes are among the top five macro factors that will most adversely impact their clients’ portfolio over the next 12 months. Other macro factors include the COVID-19 pandemic (39%), inflation (36%), global instability (28%) and rising interest rates (27%).
They also believe that taxes (21%) are among the top factors that would most likely cause market volatility in the next 12 months, with 79% of advisors/financial professionals, plus 61% of investors, anticipating volatility will ramp up in general over that time period.
These anticipated scenarios are exactly why advisors play a critical role in investment planning. To prepare for unpredictability, 66% of investors and 93% of advisors/financial professionals have a strategy in place to protect their assets against market risks. Financial professionals say they use diversification/non-correlated assets (64%), fixed annuities (48%) and fixed indexed annuities (46%) as some solutions to help protect their clients’ assets against market risks. Similarly, investors also say they use diversification/non-correlated assets (56%), fixed annuities (29%) and fixed indexed annuities (23%) as some solutions to help protect their assets against market risks.
The study notes that 63% of investors work with an advisor or financial professional, citing a need to feel more confident in their financial future.
“Knowledge established from navigating previous policy changes puts advisors and financial professionals in a great position to help investors understand potential tax changes and prepare for the future with confidence,” summarizes Nationwide’s Henderson.
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.