With Tax Day coming up and tax hike proposals coming down the pike, investors are eyeing ways to limit Uncle Sam’s take.
Last week, President Joe Biden proposed several new tax increases to help pay for his massive $5.8 trillion budget.
He wants to impose a "Billionaire Minimum Income Tax" – which would amount to a tax on wealth itself regardless of any realized gains. He also wants to raise the top tax rates on individual and corporate income.
The Biden spending bill would increase the top rate on capital gains and dividends from 20% to 39.6%. It would also exact a new “death tax” by taxing an investor’s unrealized capital gains upon passing.
All told Biden’s plan would give the U.S. the highest tax rates in the developed world. According to an analysis by the Tax Foundation, the top combined federal/state/local marginal rate on Individual income would reach a confiscatory 57.3%.
Even if Congress balks at raising taxes in an election year, doing nothing means letting tax rates rise. The top marginal tax rate on ordinary income will automatically increase to 39.6% in 2026 when parts of the 2017 tax law expire.
Meanwhile, the inflation tax is taking a huge bite out of household budgets and eating away at investors’ real returns on financial assets.
Bloomberg estimates that inflation will cost the average American family $5,000 more this year. And it will wipe trillions of dollars in value from equity and bond markets, which have been priced for low inflation to persist.
The most essential asset class to own for inflation protection is physical precious metals. Gold and silver bullion is also tax efficient compared to income-generating assets such as bonds and real estate investment trusts.
You have no income tax liability on a gold or silver coin unless and until you decide to sell and realize gains.
Unfortunately, the tax code arbitrarily treats capital gains on all forms of physical precious as “collectibles.” The IRS taxes collectibles at a rate of 28% instead of the lower rates that apply to long-term gains on paper assets such as stocks.
Still, physical precious metals have tax advantages compared to stocks, bonds, mutual funds, and exchange-traded products (including those that purport to track metals markets). These financial instruments can issue taxable distributions that you literally can’t refuse.
Except in very rare circumstances, responsible coin dealers file no tax forms with the IRS or transaction reports with other government agencies. Unlike paper assets, bullion can be held privately.
This isn’t to suggest that you should avoid reporting any capital gains on bullion that you are legally required to report! Fortunately, there are legal ways to shelter your gold and silver gains from taxation.
One of the most straightforward and effective ways to shield metals’ gains from taxes is through an IRA.
Stock brokers and financial advisors aren’t necessarily keen on informing their clients of this opportunity. But in fact, you can hold certain non-financial tangible assets – including IRS-approved gold, silver, platinum, and palladium bullion products – inside a Self-Directed IRA.
Your bullion will typically be held on your behalf by a custodian (this article goes over the nuts and bolts of selecting an IRA custodian and funding the account).
Within the IRA, you can sell some or all of your holdings, trade one metal for another, or even switch the account back to conventional financial assets with your bank or brokerage house – all without tax consequences until you take withdrawals.
When it comes time to take distributions, you can do so by taking possession of your actual IRA coins, if you wish.
It is still possible to contribute to an IRA for the tax year 2021 before the filing deadline. The maximum individual contribution to a traditional or Roth IRA is $6,000 ($7,000 if over age 50). For tax year 2022, the contribution limits are the same.
The Tax Code is complex and ever-changing. Therefore, investors should seek out the advice of a tax professional before acting on any information contained in this article.
It is especially important that taxpayers not take any chances with the accuracy of their returns given that the Internal Revenue Service is beefing up its enforcement machinery. The agency plans to hire 5,000 new employees this year and an additional 5,000 next year.
The Biden administration and Congress aim to raise revenues to try to close enormous budget deficits by any means necessary.
It’s not just billionaires they want to squeeze. The policies of Washington, D.C. will end up squeezing everyone, whether through the tax code itself or the sneaky inflation tax that hits the middle class and working class hardest.
Holding hard money is a double-play in terms of protecting against the twin threats of a falling currency and a rising revenue appetite from Joe Biden’s IRS.
About the Author:
Stefan Gleason is CEO of Money Metals Exchange, the company recently named "Best Overall Online Precious Metals Dealer" by Investopedia. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC and in hundreds of publications such as the Wall Street Journal, TheStreet, and Seeking Alpha.