President Biden recently unveiled the American Families and American Jobs Plan proposing that the government spend nearly $2 trillion on infrastructure and another $1.8 trillion on social programs which would be funded by tax hikes on the wealthy. The need for additional stimulus/spending is debatable. However, you may be subject to higher taxes and costs as a result. It’s wise is to be prepared and anticipate what may happen. This article is a summary of some of the major tax proposals, their impact on you and the planning considerations you should review with your family, business partners and trusted advisors.
There are a number of tax law changes on the table. Five areas thought to have a reasonable chance of being enacted and affecting your finances include:
- Increase in the long-term capital gains tax on high-income earners
- Elimination of the step-up in basis rule
- Reduce the estate and gift tax exclusion amount
- Raise the top ordinary income tax rate
- Increase the corporate income tax rate
However, as I write this article many of the President’s priorities are at risk of stalling with voting, infrastructure and other issues facing Republican resistance and opposition from centrist Democrats. Furthermore, Treasury Secretary Janet Yellen was only able to secure an agreement for a 15% global corporate rate during this weekend’s meeting with the G-7 and the Organization for Economic Cooperation and Development (note: China likely won’t be in agreement). Thus, spending and tax proposals may get watered down. Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, sees enormous implications with Democrats potentially short on votes. Opposing Democrats may agree to modest tax hikes on the very wealthy and a few points on the corporate rate. Additionally, they feel that Biden won’t get much more than $1 trillion and a scaled-back infrastructure bill may emerge later this summer while other major goals face an uphill fight.
Here’s a brief summary of potential major tax law changes from three planss – President Biden’s Plan, Senators Bernie Sanders and Jimmy Gomez and the “99.5% Act,” and Senator Chris Van Hollen and the “Sensible Taxation and Equity Promotion Act.”
- Reduce the current Federal gift and estate exemption of $11.7M to $3.5M.
- Reduce the gift allowance to $1M.
- Increase the Federal estate tax rates from current maximum of 40% to 45% over $3.5M, 50% over $10M and 65% over $1B.
- Very controversial is the elimination of tax-free step-up in basis at death which will tax unrealized appreciation above $1M ($2M for joint filers), plus current law capital gains exclusion of $250,000/$500,000 for a primary residence. Proposes up to 15 years to pay taxes for illiquid assets such as businesses and farms.
- Nearly doubling the top capital gains tax from 23.8% (including Medicare surcharge) to 43.4% with income over $1M, and possibly retroactive to earlier this year.
- Increase the top marginal income tax bracket to 39.6% (from 35%) for income over $452,700 single and $509,300 for joint.
- Limit 1031 like-kind exchanges above $500k in deferred capital gains.
- Increase U.S. corporate rate to 28% and adoption of a global “minimum” corporate rate of 21%.
Here are a few financial planning strategies you can consider right now:
- Review beneficiary designations in your family trust versus retirement accounts. Consider naming charities as beneficiaries of your IRAs and 401ks as charities may be tax-exempt while your daughter or nephew would be taxable.
- Meet with your estate attorney and tax professional. Consider accelerating gifts and review alternative trusts. One type of trust getting increased attention for the high net worth is the Spousal Lifetime Access Trust (SLAT). This may enable you to take advantage of the current Federal exclusion before it expires at the end of 2025 or is reduced to $3.5M (or what may be enacted) while retaining limited access to the assets. Consider restructuring your business entity to a pass-through entity.
- Review tax-efficient investment and income strategies. Accelerate income (exercise non-qualified options, bonuses, etc.). Earn tax-free income or long-term capital gains over ordinary income, review timing of asset sales, tax-loss harvesting, review Roth IRA conversions, and shoot to earn investment returns in excess of taxes and inflation. And tax deferral (such as 401k contributions, exchanges and installment sales) becomes more attractive if rates do rise.
In summary, control what you can control. Feel free to email your representatives in Washington, however, it’s important to plan ahead, meet with your advisors and make sure you stay on track with your personal financial plan. Occasionally the rules change. Once the new tax rules are released – like an updated Hoyle’s Rules of Games – adjust and play accordingly. May you have sage advice and secure your future wisely.