How Rich Clients Can Plan Federal Tax Hikes

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Taxpayers with incomes above $ 400,000 will have to watch out for potential tax changes later this year as federal Democratic lawmakers claim taxing the rich would mean more trillions in revenue and a reduction in income inequality.

“What counts as ‘wealthy’ is sure to be part of the debate,” said Sarah Allen-Anthony, managing partner of the global Private Client Services Group at Crowe in South Bend, Ind.

“Our clients generally expect tax increases to be a fait accompli,” said Jose Reynoso, director of advanced tax and estate planning for Clarfeld Citizens Private Wealth in Tarrytown, NY.

“If the changes in income tax take effect from 2022, we have to plan for the whole of 2021,” said Reynoso. “If the Effective Date is earlier, the 2021 tax reduction options may be very limited. The uncertainty about when these potential changes will go into effect is the boogeyman raising himself above the best of plans. “

An increase in normal income tax rates to pre-tax reform levels for the wealthy seems likely, “with a peak of 39.6% instead of 37%,” said Joe Roberts, senior vice president and senior wealth strategist at Rockefeller Capital Management in Philadelphia. Second, we will see a reduction in inheritance tax exemptions. Third, I think the estate tax rate will rise above the current 40% tax rate. It’s hard to say whether this will be a blanket increase to around 45% or whether it will involve a tiered structure like Sen.’s proposed new 99.5% law. [Bernie] Sanders. “

Roberts also advised looking for top-tier tax increases in states like California and New York. “Arizona nearly doubled its highest income tax bracket in 2021,” he said. “Other states could follow. The pandemic resulted in significant budget deficits in high-population countries. “

There are also concerns about the impact of state and local tax deductions and corporate tax rates, said Marc L. Scudillo, general manager of EisnerAmper of Woodbridge, New Jersey. Adjustments to financial and estate planning are increasing, “he said.

The recently introduced Federal Law on Sensible Taxes and Equity Incentives (STEP) could seriously transform valuation haircuts, rules for granting trust, and increasing the base for assets when customers die leaving behind unrealized capital gains. This is what Roberts calls longstanding basic elements of estate and gift tax planning.

In terms of capital gains, “many business owner customers are considering sales before year-end,” said Roberts. “While I think the capital gains tax hike will be a tough determination for Congress, some customers will face seven- and eight-digit differences in 2021 from 2022.”

Given the changes that may be made, there are some asset transfer measures customers can take right now. One is to maximize the current $ 11.7 million exemption by donating an irrevocable trust or using the low interest rates to shift the appreciation out of the estate. Scudillo also recommends considering life insurance for favorable tax treatment.

Bruce Primeau, CPA and President of Summit Wealth Advocates in Prior Lake, Minnesota, encourages clients who have enough time to donate $ 15,000 annually to their children or grandchildren and is considering a lump sum gift to use some of their current value Exclusion of gift tax.

Having to plan can be frustrating for clients when the philosophy of tax law seems to change with each choice.

“Most of our customers recognize the need for higher revenues to fund infrastructure programs and pandemic relief,” said Roberts, “but I think everyone would appreciate the depoliticization of taxes and a reduction in the volatility of the past few years.”

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