President Biden’s budget includes big tax hikes that will rock your tax world
President Biden has released his administration’s budget proposal for fiscal 2022. While spending focuses on infrastructure, clean energy, and more, it includes a host of proposed tax changes affecting individuals and businesses. . Some of the big tax changes that many taxpayers hoped wouldn’t happen, like Senator Van Hollen’s tax on transfers and deaths, are included. These changes would transform tax planning, increase significant revenues, and could have an impact on reducing the concentration of wealth in America.
Your next tax move
When planning your next chess move, consider that there are often many changes between the proposals and the final legislation, so it is premature to assume that the proposals will be what gets enacted. That said, taking protective measures before the new tax legislation comes into force can help. But caution remains in order. Senator Van Hollen’s proposal still has a retroactive effective date of January 1, 2021. So the planning steps you take now to avoid costly tax changes could themselves result in tax costs. Thus, immediate action, with caution and flexibility, should be evaluated with your team of advisers. Some have already described the proposal negatively as overspending and high taxes. So it is not clear what could actually be enacted. The effective date of any new changes is very important for the current planning stages.
Proposed personal tax increase
The American Families Plan increases income taxes for high-income earners, restricts similar tax-deferred trading (real estate swamps that avoid taxation of current income a sale would trigger), and more again. Some of the proposals include:
Higher tax rates: The highest tax rates will drop from 37% to 39.6%. While some expected this increase to apply to taxpayers earning more than $ 400,000, the proposal applies to incomes over $ 509,300 for married spouses and to incomes over $ 452,700 for married couples. single taxpayers. While this is a rate hike, it is not clear that for 2.6% of a rate differential, gains that might be unnecessary would be beneficial.
Capital gain rates could double: In accordance with the proposals that have caused the buzz, capital gains (eg sale of shares, real estate investment, etc.) of those whose adjusted gross income is greater than $ 1 million will be taxed at 37%. This is about double the current 20% rate of capital gains. This could have dramatic changes in investing, retirement, and other planning. It could also justify immediate planning. If you are considering selling investment real estate, a family business, or branching out from a concentrated stock, it might be beneficial to sell now before rates double! Evaluate the options with all of your advisors. It might be useful to create forecasts that reflect various fiscal and economic scenarios to determine what might be worth pursuing. But be careful. What could be the effective date of such a change? If this change is adopted, future planning could be drastically altered. Taxpayers can forecast and plan sales and income for a decade or more into the future. Then steps can be taken to monitor income realization to stay below the $ 1 million threshold and avoid doubled rates. This can include the use of installment sale processing, charitable residual trusts and more. Harvesting the gains and losses may take a very different approach than it has had in the past.
New Realization Tax on Transfers: Perhaps the most dramatic change is to make the transfer of ownership by gift and over property held at death trigger events for capital gains. It will transform planning. If you want to make gifts of valued assets (for example, to use part of the current $ 11.7 million transfer tax exemption in case it is reduced in the future), beware of the fact that these transfers could generate capital gains if new legislation. But what date could that be? So immediate action might help. But you can discuss with your advisors using techniques to unwind transfers to avoid an unintended capital gains cost on transfers. Some advisers build provisions into irrevocable trusts that are a common recipient of gift transfers that allow one or more people (administrator, a primary beneficiary, or all beneficiaries) to terminate the transfers, thereby (hopefully!) Unwinding the transfers. transfers. For income tax purposes, it may be possible to reverse a transaction in the same tax year if it exceeds the effective date. This is all complex and there are many perspectives on each potential option, so discuss them with your tax advisors. Consider what this type of change might do to future planning? If your estate pays capital gains on any appreciation in the assets you own upon death, the historical bias of holding assets until death so that the capital gains disappear (with a base adjustment of what you own at death). paid for an asset at the fair value of the property on death). It can be costly. Instead, a whole new planning approach can become the rage. Your wealth advisor and / or CPA can predict income and tax consequences for years or even decades. It may be beneficial for some to realize a certain amount of gain each year before death to avoid the almost 40% higher tax on death. Estate planning documents could benefit from changes to allow this type of planning.
Trust and Entity Tax: There is another facet of the above realization regime. A gain on unrealized appreciation would also be recognized by a trust, partnership or other unincorporated entity that owns an asset if that asset has not been the subject of a recognition event. in the previous 90 years, this test period commencing January 1, 1940. The first possible recognition event for any taxpayer under this provision would therefore be December 31, 2030. This could suggest that if you have created irrevocable trusts ( or create them now to try to avoid a reduction in exemption which might not be incorporated in new legislation) a capital gains tax could be due on any capital gain as early as 2030! What planning options might exist? Could trustees be able to distribute appreciated assets to beneficiaries to avoid this tax? Will the trust agreements allow this? Will many grandchildren be driving scorching sports cars in 2031?
Social security taxes: Another proposal is to coordinate taxes on net investment income and the self-employed. Historically, higher income taxpayers who earned income from a closed business, such as a doctor from his medical practice, paid themselves a lower salary which was subject to Social Security taxes. The remaining profits were withdrawn as a distribution to owners who were not subject to these taxes. The savings, especially over years of work, could add up. The proposal is that all passed-on business income (e.g. S corporations, limited liability companies, partnerships) from high income taxpayers will be subject to either net investment income tax or taxes. social security. This could result in the restructuring of closed business entities, revisions of governing documents (eg partnership agreements) and changes in the way profits, salaries and other payments are made. This can have ripple effects on valuations, buyout agreements, etc.
Interest carried: Hedge fund principals may face higher taxes because deferred interest will be taxed as ordinary income instead of capital gains, roughly doubling the rates.
No more audits: IRS will receive more funds to expand the application. It could mean a lot more audits.
Business tax increases
The American Jobs Plan proposes several corporate tax changes, including increasing the corporate tax rate to 28% from the current 21%. For those who have restructured private family and business entities into a regular or “C” corporation in order to take advantage of lower corporate tax rates, this change might cause them to consider moving to an S corporation or a “C” corporation. other format. This, however, is not that simple as there may be costs involved in restructuring C corporations. Be sure to review all plans with all of your tax advisors before taking any action. Going forward, the decision as to the type of business structure and choice of entity may change from what it has been since the 2017 tax law changes. Also, be sure to review your documentation. estate planning, especially trusts. If you change a C corporation to an S corporation, your irrevocable trusts will require special provisions to avoid tarnishing the privileged tax status of an S corporation (transferring income to owners instead of paying corporate tax). There is a long list of other changes, but these are beyond the scope of this preliminary discussion.