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Andy Friedman: Tax Bill Is a Must-Do This Year

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What You Need to Know

  • Tax increases can spook the markets, Friedman warns.
  • Tax legislation must pass this year because next year the focus will be on the midterm elections.
  • Friedman suggests selling appreciated assets and considering moves like Roth conversions.

Andy Friedman, founder and principal of The Washington Update, says a tax bill “has to get wrapped up” this year and warns that “tax increases can spook the markets.”

In a recent interview with ThinkAdvisor, Friedman — who develops the content for The Washington Update and whom CNBC calls “one of Washington’s savviest political observers” — weighs in on what advisors should be doing now to help their clients brace for tax increases.

No stranger to helping clients navigate taxes, Friedman was tax counsel to Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League.

He’s still a baseball fan. “You have to go to baseball games,” Friedman enthused.

Also under his belt: nearly 30 years as a senior partner with the law firm Covington & Burling in Washington, where he was head of the tax and corporate groups. Friedman received his law degree from the Harvard Law School.

On Biden’s Tax Hike Plans

“From a market perspective, the concern has to be that the tax increases can spook the markets. And I think those tax increases are going to morph as they go through Congress so there’ll be ongoing volatility as we see each change. But, keep in mind that the tax increases are going to accompany stimulus that is much greater than the tax increases themselves.”

He continued: “If you look at say, the infrastructure bill, the spending is over 8 years, but the tax increases are over 15 years, which means the amount of stimulus going into the economy is going to be greater than the tax increase. I think a negative reaction may be overwrought and that the markets will come to realize there’s a lot of stimulus here.”

What Advisors Should Do

“What advisors have to do is be active,” Friedman said. “I don’t accept this word ‘proactive,’ in planning for these increases. Keep in mind that a capital gains increase, we may not know of the effective date. It may make sense to take actions, like on the capital gains. If there’s assets you’re thinking of selling, let’s move up on that. If there are assets that you want to keep you can repurchase them immediately — the wash sale rule doesn’t apply to gains.”

As Friedman explained, the wash sale rule says “that if you sell a stock at a loss, you can’t turn around and buy that stock back right away, because you really haven’t sold it. You have to wait 30 days between you sell the stock at a loss and when you buy it back.”

Bottom line: “You have to prepare” for tax increases. There are a number of options that can be considered, he continued, like Roth conversions, accelerating deductions, donating property to charity.

“Rather than sit there worried, this is actually an opportunity to talk with clients about taking steps to mitigate the consequences of these tax increases.”

Clock Is Ticking

While this year is all about Biden’s push to increases taxes and “mitigating the consequences of that tax legislation,” next year “you’re going to see a complete shift.”

Tax legislation has “gotta happen this year” as next year “we’re in an election year; then we’re at the midterms when Democrats could lose Congress.”

As it stands now, Biden has two proposals. “One is infrastructure funded by corporate tax increases and one is the more social program changes funded by individual tax increases,” Friedman explained. “It seems inevitable to me that the tax increases get put together in a single bill under infrastructure and some items in the second bill, The American Families Plan, get incorporated into the single bill and that goes through under reconciliation. I don’t know why you would go through this twice.”

In His Spare Time

Friedman is reading a book that his daughter was assigned in high school, “The Things They Carry.”

“It’s great,” he says.

For news and analysis, Friedman reads The Washington Post, trade publications and “a bunch of technical tax stuff.”