Debate around the current presidential administration's proposed reconciliation package has investors, particularly those of high income, bracing for potential tax impacts. The proposed reconciliation package, which includes plans to boost the nation's social safety net and provide a framework to fight climate change, 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.

According to our seventh annual Advisor Authority study, powered by the Nationwide Retirement Institute®, year-over-year, investors say taxes are one of their top three biggest financial concerns. In fact, investors' concerns about taxes have nearly doubled in 2021 vs 2020 (27% vs 15%). When looking at wealthy investors, taxes move up on the list of concerns. High Net Worth (HNW) investors' (those with household investable assets ranging from $1 million to less than $5 million) concerns about taxes nearly tripled year-over-year from 2021 to 2020 (27% vs 9%). And for the Ultra High Net Worth (UHNW) investors (those with household investable assets of $5 million or more), taxes are one of their top concerns this year (32%), increasing from 26% from 2020.

While the Build Back Better bill does have tax implications for some Americans, many may be overestimating this risk unless they are of extreme wealth. Given that some of the more ambitious plans announced early in the process of the bill's development have since hit the cutting room floor, most Americans will not see significant tax increases from this plan.

"Under the current proposed reconciliation plan, income taxes would increase only for very high-income individuals—not most Americans," said Eric Henderson, President, Nationwide Annuity. "Financial professionals have a chance to provide clarity for clients who may be bracing for the worst without understanding how the package has been scaled back. This bill would increase tax rates for high earners, which is why many are already thinking about how they can manage their tax exposure – and they will be looking to their advisor or financial professional to help them navigate this challenge. For these clients, investment vehicles such as life insurance and annuities can be useful tools for tax deferral and managing future taxes."

Investors and Financial Professionals Brace for Potential Tax Impact on Investments

Advisors and financial professionals say that taxes (26%) are among the top five macro factors that will most adversely impact their clients' portfolio over the next 12 months. Other top 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, and 79% of advisors/financial professionals, along with 61% of investors, anticipate volatility will ramp up in general over that time period.

With the unpredictability of the market and ongoing discussions around tax policy in Washington, financial professionals and investors are bracing for any possible impact to investments. 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.

Advisors are substantially more likely than investors to say that tax hikes will cause them to increase their use of tax-deferred annuities. In fact, under the current proposed tax plan, roughly half of advisors/financial professionals, compared to less than one third of investors, said an increase in income tax (49% vs 31%) will make them more likely to adopt annuities.

Financial Professionals Poised to Guide Investors Through Change  

According to the Advisor Authority study, 63% of investors work with an advisor or financial professional. Moreover, 37% of investors said the main reason they work with an advisor or financial professional is to feel more confident in their financial future and 5% said it is to help manage their taxes.

With taxes being a concern for many investors, it is no surprise that one in four (26%) advisors/financial professionals said they are most interested in integrating tax optimization tools into their practice in the next 12 months so they can meet those needs.

"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," said Henderson.

For additional insights on this survey data, financial professionals can download the latest infographic from the seventh annual Advisor Authority study.

The Nationwide Retirement Institute offers a variety of tax efficient retirement income resources for financial professionals.

Nationwide's seventh annual Advisor Authority study powered by the Nationwide Retirement Institute® explores critical issues confronting advisors, financial professionals and individual investors—and the innovative techniques that they need to succeed in today's complex market. This is the third in a series of ongoing releases from the seventh annual study.