UPDATED – Preparing for Potential Changes to Individual and Estate Taxes by Tony Gutierrez, CPA
As the government begins deliberating the Biden administration’s $2.3 trillion infrastructure bill and $1.8 trillion American Families Plan, one thing is for certain: individual and corporate taxes will be impacted. Now is a critical time for high-net-worth families and businesses to get ahead of proposed tax increases and meet with their CPAs and advisors to prepare their estates for maximum tax efficiency and wealth preservation under tax reform.
The president outlined his tax agenda as part of the American Families Plan with the intent to reform the tax code and “ensure that high-income Americans pay the tax they owe under the law.” To support this aim, the administration proposes to 1) increase the IRS’s 2022 audit and enforcement budget and 2) require financial institutions to report to the IRS information on clients’ account flows, including earnings from investments and business activity, in the same manner that employers report employee wages. Here are some of the proposed provisions tax included in the president’s plan:
- Increase the top income-tax rate to 39.6 (plus the 3.8 percent Medicare tax), which was the top rate in effect before the Trump administration’s Tax Cuts and Jobs Act reduced it to 37 percent;
- Increase the long-term capital gains tax rate from the current 20 percent to 39.6 percent (plus the additional 3.8 Medicare tax) for taxpayers with income of more than $1 million. Depending on the state where an individual lives, the actual rate of tax on capital gains paid at the federal and local level could exceed 50 percent.
- Eliminate the step-up in tax basis of appreciated assets inherited at death when the gains exceed $1 million (or $2.5 million per couple when combined with existing real estate exemptions). This provision is intended to prevent individuals from the practice of enjoying asset appreciation and unrealized gains during life and allowing heirs to sell those assets without exposure to capital gains tax in the future.
- Limit the tax-deferral benefits of 1031 like-kind exchanges of real property to those that results in a gain of no more than $500,000;
- Eliminate the carried interest loophole that allows managers of hedge funds and partnerships to pay lower ordinary tax rates on their income;
- Make permanent the current limitation in place through 2026 that restricts non-corporate taxpayers from claiming large, excess business losses;
Financial planning around tax reform is never a simple process. However, planning is required to avoid being blindsided by significant tax hikes that can ruin the most well-thought-out wealth accumulation and preservation strategies. The sooner you get started, the more prepared you will be for eventual change – whenever that may be.
Following are just four income and estate tax planning techniques to consider under the guidance of your professional advisors and CPAs. It is important to remember that what may be appropriate for one taxpayer may not apply to another.
- Accelerate income into the current year to take advantage of presently low income-tax rates and delay deductions until 2022. With the Biden administration’s proposals to increase both the top federal income tax rate and the tax on capital gains and qualified dividends to 39.6 percent, plus the Medicare surtax of 3.8 percent, wealthy individuals with taxable income of more than $1 million may be subject to a top rate of 43.4 percent.
- Sell long-held, highly appreciated assets and pay today’s capital gains rates of as much as 23.8 percent.
- Take advantage of the current estate tax exemption (i.e., $23.4 million for a married couple or $11.7 million for an individual) by transferring assets out of your taxable estate via tax-efficient gifting to children.
- Consider the use of trusts, such as Spousal Lifetime Access Trusts (SLATs) to hold assets outside of your taxable estate. Currently, an estate with assets valued in excess of $23 million for a couple ($11.5 million for an individual) is taxed at a flat rate of 40 percent.
With the prospect of tax change on the horizon, now is the time to meet with your trusted advisors to implement strategies that meet your unique need and goals while maintaining tax efficiency today and into the future.
About the Author: Tony Gutierrez, CPA, is a director in the International Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or firstname.lastname@example.org.