President Biden’s budget includes big tax hikes that will rock your tax world
President Biden has released his administration’s budget proposal for fiscal 2022. While spending focuses on infrastructure, clean energy, and more, it includes a host of proposed tax changes affecting individuals and businesses. . Some of the important tax changes that many taxpayers hoped wouldn’t happen, like Senator Van Hollen’s tax on transfers and deaths, are included. These changes would transform tax planning, increase significant revenues, and could have an impact on reducing the concentration of wealth in America.
Your next tax move
When planning your next chess move, bear in mind that there are often many changes between the proposals and the final legislation, so it is premature to assume that the proposals will be what gets passed. That said, taking protective measures before the new tax laws come into force can help. But caution remains in order. Senator Van Hollen’s proposal still has a retroactive effective date of January 1, 2021. Planning for the steps you take now to avoid costly tax changes could itself result in tax costs. Immediate action, with prudence and flexibility, should therefore be evaluated with your team of advisers. Some have already characterized the proposal negatively as overspending and high taxes. So it is not clear what could actually be enacted. The effective date of any new changes is very important for the current planning stages.
Proposed personal tax increase
The American Families Plan increases income taxes for high-income earners, limits similar tax-deferred trades (real estate swamps that avoid the current taxation of income a sale would trigger), and more again. Some of the proposals include:
Higher tax rates: The highest tax rates will drop from 37% to 39.6%. While some expected this increase to apply to taxpayers earning more than $ 400,000, the proposal applies to income over $ 509,300 for married co-taxpayers and to income over $ 452,700. $ for single taxpayers. Although this is a rate hike, it is not certain that for 2.6% of a rate differential it would be beneficial to trigger gains that may be unnecessary.
Capital gain rates could double: In accordance with the proposals that have caused the buzz, capital gains (eg sale of shares, real estate investment, etc.) of those with adjusted gross income above $ 1 million will be taxed at 37%. This is about double the current capital gains rate of 20%. This could have dramatic changes in investing, retirement, and other planning activities. It could also justify immediate planning. If you are considering selling an investment property, a family business, or diversifying from a concentrated equity position, it might be beneficial to sell now before rates double! Evaluate the options with all of your advisors. It might be useful to create forecasts that reflect various fiscal and economic scenarios to determine what might be worth pursuing. But be careful. What could be the effective date of such a change? If this change is adopted, future planning could be drastically altered. Taxpayers can forecast and plan sales and income for a decade or more into the future. Then, steps can be taken to monitor income realization to stay below the $ 1 million threshold and avoid rate doubling. This can include the use of an installment sale treatment, charitable residual trusts and more. Harvesting the gains and losses may take a very different approach from that used in the past.
New realization tax on transfers: Perhaps the most dramatic change is to make the transfer of ownership by gift and over assets held at death trigger events for capital gains. It will transform planning. If you want to make gifts of valued assets (for example to use part of the current $ 11.7 million transfer tax exemption just in case it is reduced in the future), be aware that these transfers could trigger capital gains if they are made after the effective date of the new legislation. But what date could that be? So the immediate action might be worth it. But you can discuss with your advisors the use of techniques to unwind transfers to avoid an unintentional capital gains cost on transfers. Some advisers build provisions into irrevocable trusts that are a common recipient of gift transfers that allow one or more people (trustee, a primary beneficiary, or all beneficiaries) to decline transfers, thereby (hopefully!) Voiding the transfers. transfers. For income tax purposes, it may be possible to reverse a transaction in the same tax year if the move exceeds the effective date. This is all complex and there are many perspectives on each potential option, so discuss them with your tax advisors. Consider what this type of change might do on future planning? If your estate pays capital gains on any appreciation in the assets you own upon death, the historical bias of holding assets until death so that the capital gains disappear (with a base adjustment of what you paid for an asset at the fair value of the property on death). It can be costly. Instead, a whole new planning approach can become the rage. You could ask your wealth advisor and / or CPA to forecast income and tax consequences for years or even decades. It may be beneficial for some to realize a certain amount of gain each year before death to avoid the almost 40% higher tax on death. Estate planning documents could benefit from changes to allow this type of planning.
Trust and Entity Tax: There is another facet to the above realization regime. The gain on unrealized appreciation would also be recognized by a trust, partnership or other unincorporated entity that owns property if that property has not been the subject of an event. recognition over the past 90 years, this probationary period beginning January 1, 1940. The first possible recognition event for any taxpayer under this provision would therefore be December 31, 2030. This could suggest that if you have created irrevocable trusts (or create them now to try to avoid an exemption reduction which might not be incorporated in the new legislation) a capital gains tax could be due on any appreciation as early as 2030! What planning options might exist? Could trustees be able to distribute appreciated assets to beneficiaries to avoid this tax? Will the trust agreements allow this? Will many grandchildren drive red sports cars in 2031?
Social security taxes: Another proposal is to coordinate net investment income and taxes on self-employment. Historically, higher-income taxpayers who earned income from a closed business, such as a doctor from his medical practice, paid themselves a lower salary subject to Social Security taxes. The remaining profits were withdrawn as a distribution to owners not subject to these taxes. The savings, especially over years of work, could add up. The proposal is that all indirect business income (e.g. S corporations, limited liability companies, partnerships) of high income taxpayers will be subject to either net investment income tax or tax. social security. This could result in the restructuring of closely held business entities, revisions to governing documents (eg partnership agreements) and changes in the way profits, salaries and other payments are made. This can have ripple effects on valuations, buyout agreements, etc.
Interest carried: Hedge fund executives may face higher taxes, as interest earned will be taxed as ordinary income instead of capital gains, roughly a doubling of rates.
No more audits: IRS will receive more funding to expand law enforcement. It could mean a lot more audits.
Increase in business tax
The American Jobs Plan proposes several corporate tax changes, including increasing the corporate tax rate to 28% from its current 21%. For those who have restructured family entities and tightly owned businesses into a regular or “C” corporation to take advantage of lower corporate tax rates, this change could cause them to consider moving to an S corporation or another. format. This is not, however, that simple as there may be costs associated with restructuring C companies. Be sure to review your plans with all of your tax advisors before taking any action. Going forward, the decision as to what type of business structure and which entity to choose may change from what it was since the 2017 tax law changes. Also, be careful when reviewing your documents. estate planning, especially trusts. If you change from a C corporation to an S corporation, your irrevocable trusts will require special provisions to avoid undermining the tax-advantaged status of an S corporation (the passing of income to owners instead of paying corporate tax). There is a long list of other changes, but these are beyond the scope of this preliminary discussion.