What to do now to arrange for tax law modifications

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It is possible that important changes in tax law will be imminent, including the abolition of preferential tax treatment for long-term capital gains, a new wealth tax for households with annual income greater than $ 50 million, and changes in taxation related to carried interest and estate planning. But it’s not too late to plan ahead to accommodate these potential tax law changes.

“There is likely still time as the changes are unlikely to apply retrospectively as of January 1, 2021,” said Bill Smith, chief executive of the CBIZ MHM National Treasury.

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With that in mind, Smith and other financial experts say now to prepare for future changes.

Make plans for your investments

“Economists say the increase in capital gains tax to 39.6% will only affect less than 1% of American households because it only applies when income is over $ 1 million. That being said, the same economists say it will be a tax loss unless the death base increase is abolished, “Smith said. “Since the wealthy do not normally need the proceeds of their investments to live on, they can (1) sell now and use current prices so that any secured profit is treated with favorable taxation; (2) hold until the next Republican takeover of the House of Representatives, Senate, and White House and hope for tax cuts; or (3) if the top-up is not canceled after death, hold until death. You can also use gift giving strategies to bring the profits to lower-income family members. “

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Defer income if you have a high income

The American family plan proposed by President Joe Biden would raise the top tax rate from 37% to 39.6%. To avoid having to pay higher taxes, high earners should be proactive in deferring income. Jennifer Marshall, Director of Tax Services at Bryn Mawr Trust, suggests the following strategies:

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  • Invest in tax-exempt municipal bonds instead of corporate bonds to reduce ordinary income. “Think of tax-privileged investments like cash value life insurance. If properly structured, money grows tax-free and can be distributed tax-free. “

  • Perform a Roth IRA conversion. “Pay the tax now while it’s lower, and withdraw tax-free later.”

Read: 10 Ways To Protect Yourself And Your Finances Now That The Taxes Are In

Reevaluate your corporate stock holdings

An increase in the corporate tax rate could have trickle-down effects for individuals, particularly with regard to their investment portfolio.

“Individuals holding publicly traded company stocks may prefer growth companies to dividend-paying companies as long as they (1) do not exceed the $ 1 million income threshold or (2) can afford to hold the stock over time.” said Smith said.

Be careful: What is an unrealized gain or loss and is it taxed?

Minimize inheritance taxes now

“There are several legislative proposals that have the potential to lower tax exemptions, abolish the top-up base on assets that are passed on after death, and eliminate some tax-efficient estate planning techniques,” said Michael Roberts, president of the Arden Trust Company. “While it is always important to have an updated estate plan to protect your beneficiaries and distribute the wealth the way you want, there are a number of steps that individuals can consider now to minimize inheritance tax before potential ones Changes to the law come into force. “

See: The Best I Ever Did With My Tax Refund

Here are the steps Roberts recommends:

  • Maximize the annual gift waiver. “For 2021, the annual gift tax exclusion is $ 15,000 per donor and recipient. Individuals can give up to $ 15,000 in net worth to anyone per year, free of federal gift taxes. For spouse gifts, the annual tax-free gift allowance is doubled to $ 30,000 per recipient. The proposals under consideration would limit the annual gift tax exclusion for all recipients to as little as $ 20,000 to $ 50,000. “

  • Take advantage of the lifelong inheritance and gift tax exemption. “The current lifetime inheritance and gift tax exemption of $ 11.7 million is expected to decrease to $ 5.3 million in 2026, and an even lower threshold may be in sight under the new administration. Donating part of your estate to a trust fund for a spouse or heir could help maximize the current allowance. In this way, your gift can be pledged at the higher tax allowance before tax law changes come into force at the end of the year. “

  • Fund a Grantor Retained Annuity Trust (GRAT). “For assets that are expected to go up, consider placing them in a GRAT. In this method, an irrevocable trust provides its beneficiary with a pension that comes from the value-increasing property and is paid annually for a predetermined period of time. After the trust expires, the beneficiary receives the remaining assets tax-free. “

  • Make charitable gifts. “With a Charitable Remainder Trust, a large sum of money can be paid into the trust, which then pays a fixed annuity each year that will benefit you or your loved ones during your lifetime. The rest of your trust will go to the charity of your choice after your death. “

“Complex estate planning takes time,” said Roberts. “While these legislative initiatives have not yet been passed, individuals are rushing to give gifts before potential tax law changes are implemented in late 2021. If these changes could affect you, do not hesitate with opportunistic planning. “

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Last updated: June 2, 2021

This article originally appeared on GOBankingRates.com: What You Should Do Now to Prepare for Tax Law Changes