We’ve all known for some time that the Biden administration wants to increase income and estate taxes in a variety of ways. Their proposals include raising the top income tax rate for couples filing jointly to 39.6% on income over approximately $500,000 and for taxing capital gains and qualified dividends at the same rate for taxpayers earning over $1 million per year. Further, they would raise taxes by substantially lowering the estate tax exemption and limiting or eliminating the step up in basis for appreciated assets.
At this time, it is impossible to know what exactly will be passed and when any changes will be effective. Since we can’t know exactly what will happen, we would not advocate for making any big moves now (unless they make sense regardless of any changes in the tax law). Having said that, for anyone who would be affected by the tax increases noted above we strongly recommend that they consult with their tax and financial advisors to at least understand and consider any options which would mitigate the tax increases.
Here are a few options to consider:
- To the extent possible or controllable, consider the implications of shifting income between tax years. We have to be mindful of the $500k (married filing jointly) and the $1 million triggers for higher taxes.
- Make sure you understand your options for maximizing contributions to qualified plans. This is particularly true for self-employed or small business owners.
- Think about accelerating the taking of more capital gains than usual if taxable income will exceed $1 million. This might include the accelerating of selling business interests, etc. However, this strategy requires very careful planning in order to avoid allowing the “tax tail to wag the dog”.
- Evaluate a Roth conversion strategy. In a world with higher income and capital gains rates, the Roth will become even more valuable to high income earners.
- Develop a tax-smart charitable giving strategy.
- Consider accelerating gifts and /or funding trusts for children or others. The benefits include removing assets from your estate, thus reducing future estate taxes, as well as the opportunity to see your gifts being enjoyed while you’re still alive.
A Greater Need for Planning: These are complex issues with both financial and personal/family implications. If you are affected by the proposed tax law changes, we encourage you to solicit professional advice. Let us know if we can help.
Matt Childs and Andrew Henry