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April 27, 2021
2021 1st Half Review
August 9, 2021Tax Planning in 2021
As the 2020 tax season winds down, we turn our thoughts to potential tax changes affecting 2021. The Biden administration ran on a platform of raising income taxes and reducing the estate tax planning options currently available to families.
During the last few weeks, different ideas have been expressed and actual proposals have started to take shape.
INCOME TAX PROPOSALS:
President Biden recently announced that he proposes raising the top marginal tax rate from 37% to 39.6%.
In addition, he proposes taxing long term capital gains and qualified dividends at ordinary tax rates for taxpayers earning over $1 million.
Currently, long term capital gains and qualified dividends are taxed at a maximum federal income tax rate of 20%. In addition, capital gains and qualified dividends are subject to the federal NIIT – Net Investment Income Tax – rate of 3.8% plus the applicable state income tax rate. This proposed change could effectively tax capital gains and qualifying dividends at a combined tax rate of 50%.
This effectively DOUBLES the tax rate on these investment earnings.
INCOME TAX PROPOSALS:
The Biden plan would also limit the value of itemized tax deductions to a maximum federal tax rate of 28%.
The Biden administration would also like to raise the tax rate for corporations.
The Biden plan proposes raising the tax rate for corporations to 28%.
The Biden proposal would put the U.S. in the middle of the pack with other developed nations.
ESTATE & GIFT TAX PROPOSALS:
The Act proposes to drop the estate tax exemption to $3.5 million per individual, $7 million for a married couple.
Sander’s Act also lowers the lifetime gift exemption to $1 million per individual. It would also limit the annual exemption to $10,000 and further limit the annual exemption to two such gifts per year (maximum of $20,000).
Under existing law, an individual’s $11.7 million lifetime exemption covers both gift and estate transfers. This allows individuals to utilize their lifetime exemption through gifting while alive rather than having to wait until transfers at death. In addition, an individual can make an unlimited number of annual gifts to other individuals of $15,000 each that do not count against their lifetime exemption.
45% transfers between $3.5 million to $10 million
50% transfers between $10 million and $50 million
55% transfers between $50 million and $1 billion
65% transfers over $1 billion
In addition to lowering the exemption amount, the Act would increase the tax rate on taxable transfers. The Act proposes to raise transfer tax rates as follows.
Currently the transfer tax rate is a flat 40% on transfers over the lifetime exclusion of $11.7 million per individual.
ESTATE & GIFT TAX PROPOSALS:
The Act proposes to restrict transfers to fifty (50) years before submitting the assets to an additional estate transfer tax
Another proposal would eliminate valuation discounts for computing the fair market value (FMV) for the transfer of certain passive assets.
Currently, valuation methodology allows a minority interest and/or a lack of marketability discount to be calculated to determine the fair market value for the transfer of certain assets. These discounts calculate the reduction in the value of an asset that you cannot easily liquidate.
And one of the most impactful changes being discussed is the elimination of the step-up in basis on assets transferred at death. This is proposed under the STEP Act – Sensible Taxation and Equity Promotion Act – also introduced in the Senate. This would subject assets to taxation on the unrealized appreciation, as if sold, upon the transfer of assets by gift or inheritance.
Under current law, upon death, an asset is transferred at its fair market value. Thus, the beneficiary only recognizes gain when they sell the asset on the increase in value during the period they actually held the asset. In addition, the unrealized appreciation at death escapes capital gain tax to the deceased.
Another proposal would eliminate valuation discounts for computing the fair market value (FMV) for the transfer of certain passive assets.
RETIREMENT PLANNING:
For the majority of non-spouse beneficiaries (and some other beneficiaries) the beneficiary of an inherited IRA or employer 401k plan must take their funds out of the plan over a period no longer than ten years. This change ended the ability to stretch inherited retirement plan assets over the beneficiaries’ lifetime.
At JVL, we understand the importance taxes have on an investment portfolio. We focus on the after-tax returns of client portfolios and how they relate to an overall investment strategy.
We also help clients develop their customized estate planning strategies that minimize transfer taxes and maximize after tax transfers for their heirs. We have actively used the strategies being targeted and will continue to watch as the proposals work themselves through Congress.
We believe in being proactive as the changes move through Congress, and will be reaching out to our clients affected by these changes.
If you know of someone who can benefit from our services, please let us know and we’d be happy to assist.
Jerry VanderLugt CPA, CFP, CVA
Matthew Kunnen, CFA, CFP
Chad Soukup, CPA, CFP
