The Georgia runoff outcomes might result in vital tax adjustments for top web price people

Possible changes

Given the results of the recent Georgia runoff elections, elements of President Elect Biden’s tax plan could be approved sometime this year. This would be achieved through a budget reconciliation that would only require the approval of a simple Senate majority (e.g., all 50 Democrats vote for the measure, all 50 Republicans vote against, and the Vice President casts the casting vote). Below are some of the possible changes and how those changes could affect the estate planning implemented in 2021.

Income tax increases

At present, private individuals pay income tax on ordinary income with a maximum rate of 37%. Capital gains and qualifying dividends are subject to an income tax rate of 20% plus a capital gains tax of 3.8%. Under Biden’s plan, the maximum ordinary income rate would increase to 39.6% (which would be a return to the rate prior to the 2017 Tax Reduction and Employment Act (“TCJA”) coming into force). Importantly, for taxpayers with incomes above $ 1 million, capital gains are taxed as normal income, at a maximum rate of 39.6% (and presumably the 3.8% net withholding tax would still apply).

Lower inheritance tax exemption; Higher rate

Currently, assets that are in the event of death are subject to a 40% estate tax. However, for 2021, the inheritance tax exemption allows individuals to remit up to $ 11.7 million on death without federal inheritance tax. For married couples, each spouse can claim a separate $ 11.7 million exemption, which means a married couple can currently give $ 23.4 million to their children with no estate tax. A separate lifelong gift exemption (also $ 11.7 million for 2021) allows individuals to give great gifts for life tax-free. The amount of inheritance tax exemption available on death is reduced by the amount of gift tax exemption used on lifelong gifts. Currently, for example, a $ 5 million gift would be exempt from gift tax because it is less than the federal tax exemption ($ 11.7 million), but the donor’s inheritance tax exemption of $ 11.7 million would be. Reduce USD to 6.7 million USD.

The current gift and inheritance tax exemptions are due to a change in the TCJA that has generally doubled the amount of exemptions in effect in 2017. These provisions of the TCJA expire in late 2025. For 2026 and years after, inheritance and gift tax exemptions will be roughly half of the current level. President-elect Biden’s tax proposal would accelerate this change by increasing federal estate and gift tax rates to 45% and reverting inheritance and gift tax exemptions to their 2009 levels – an inheritance tax exemption of $ 3.5 million and a gift tax exemption of $ 1 million.

Eliminate favorable income tax treatment for inherited property

Currently, inherited property receives an income tax base that is “increased” to its market value at the time of the original owner’s death. This increase in base generally eliminates the income tax associated with the appreciation of the property over the life of the original owner. For example, if person A bought shares for $ 500,000 and years later sold that position for $ 1 million, the profit of $ 500,000 would be subject to income tax. At the current rates of capital gains, the tax owed would be $ 119,000. However, if A’s child inherited that stock, the stock’s tax base would be increased to its fair market value at A’s death of $ 1 million. Then, if A’s child sold the stock for $ 1 million, profits and income tax would be zero. Biden’s proposal would eliminate the base increase. The cost of doing this is significant, especially with the potential for elimination of cheap capital gains rates for incomes over $ 1 million. Assuming the law changes, if A’s child sells the shares after A’s death, the $ 500,000 gain would be taxable. The tax cost for this is $ 217,000 (provided the child has an income of more than $ 1 million).

Possible retroactive effect of changes; Planning considerations

Although this is unlikely, the legislative changes described above could be made retrospectively as of January 1, 2021. This could be a very expensive result for gifts given prior to the law change based on the current exemption amount. For example, if individual A gave a $ 11.7 million gift sometime in 2021 and the gift tax exemption was later reduced to $ 1 million and applied retrospectively to the start of the year, A could have inadvertent gift tax costs in Can cause amount of about $ 4.8 million.

However, there are a number of ways to structure gifts that should avoid the outcome described above, even if changes in tax law are made retrospectively to a date prior to the gift. This structuring must be viewed in the light of the overall planning objective to which the intended gift belongs, and in view of applicable jurisdiction and other authorities that set clear guidelines for the structuring of these gifts.