As with any new administration, experts speculate about what President Biden’s proposed changes to tax law might look like – and what they might mean for you.
The president has made his priorities somewhat clear: increase taxes on those who earn more than $ 400,000 a year, increase capital gains taxes, and tax more of the wealth that is carried over after someone dies.
Some of these changes can have a significant impact on your current tax strategy and estate plan. These possible changes include:
Wage and income tax
1. Increase in payroll taxes for individuals earning more than $ 400,000 to:
• Increase in tax rate on income over $ 400,000 from 37% to 39.6%.
• Add a Social Security Tax of 12.4% on income over $ 400,000 – split evenly between employer and employee.
• Limits on individual deductions, including charitable write-offs.
2. Extension of tax credits for people with children by:
• Expand child and dependent care tax credit to a maximum of $ 8,000 in qualifying expenses or $ 16,000 for multiple dependents and increase the maximum reimbursement rate to 50%.
• Child tax credit increased to a maximum of $ 3,000 for children under the age of 18, with a bonus credit of $ 600 for children under six.
Capital gains taxes
For those with incomes over $ 1 million:
• Increase the tax rate on long-term investment income from 20% to the new normal income tax rate – likely 39.6%. Adding the net withholding tax of 3.8% would correspond to a tax rate of 43.4% on this income.
• Taxation of qualifying dividends at the new ordinary income tax rate.
• Eliminate 1,031 high income investment property exchanges, exposing the investor to capital gains.
Business taxes
• Increase in the corporate tax rate from 21 to 28%.
• Creation of a minimum tax of 15% on companies with an income of more than USD 100 million.
Property transfer taxes
• Reduction in inheritance, gift, and generational transfer tax exemption is $ 11.7 million to $ 5.58 million, or $ 3.5 million per person.
• Increase in the estate and gift tax rate from 40 to 45%.
• Eliminating an increase in the base for assets that pass on death, possibly requiring heirs to inherit assets with a base transferred from the deceased, or possibly imposing a tax on capital gains at that time.
• Restrict the use of pension foundations that are withheld by fellows.
• Limiting the life of Dynasty Trusts by removing the tax exemption status for the transfer of generations after a certain number of years.
• Limit annual knockout gifts to $ 50,000 per year per donor.
• Eliminate the ability of trust builders to trust assets to their children while maintaining the income tax burden.
Given the government’s focus on the pandemic in the first half of 2021, it is unlikely that any new tax laws will be passed before the third or fourth quarter. This makes it unlikely that changes in tax law will be made retrospectively as of January 1st. However, given the government’s increased need for tax revenue, we cannot account for the opportunity. Given this uncertainty, it is important to consider now how these proposed changes may affect you and whether you will need to implement new planning strategies sooner rather than later.
Beth O’Laughlin is a partner at Warner Norcross + Judd LLP law firm specializing in trust and estate planning and administration, succession planning, taxation and asset preservation. She can be reached at [email protected].