Don’t let the tax tail wag the dog. Democrats now control the White House and both chambers of Congress – ultimately increasing the likelihood of tax increases at the federal level. Between President Biden’s Agenda outlined in his proposed Tax and economic plans and the current deficit caused by the Pandemic, these measures Dec increase income are almost inevitable.
However, this political certainty is accompanied by uncertainty in the Planning of income and property taxes. Although none of us have Crystal balls, there are some tax changes that will probably become law:
- At the top of the list is an increase in the highest marginal income of the federal government from $ 37 to $39.6 for married couples with an income of more than $ 400,000. That was the highest Rate in most of the Obama administration. The same ratio can be applied to qualified dividends for persons with income of 39.6%, capital gains (currently the highest capital gain is 23.8%) and income of more than $ 1 million.
- In addition, Biden may increase inheritance tax. The changes could include reducing the current Federal exemption from $11.70 million to about $3.5 million to $5 million and increasing the top tax rate from 40% to 45%.
Tax increases that cannot be excluded:
- Bringing the Social Security Tax rate of 12.4% to incomes above $ 400,000.
- Limit the benefit of decomposed deductions to 28%.
- Eliminating the “increase” of the basis for assets left to heirs is a step that will significantly increase the tax bills of Heirs who sell these assets.
- Reduction or elimination of the qualified business income deduction for Incomes over $ 400,000.
While no one can say for sure what has been proposed or implemented, there are steps individuals can take right now to make predictions and start the year strongly:
- Space it out: at this stage of the change of government, it is impossible to say whether the possible tax increases will occur retrospectively in 2021 or will begin in 2022. But when it comes to income taxes, people have some control over how their income is classified. If possible, take action to stay below the tax thresholds — $ 400,000 for income, $ 1 million for capital gains and the imposition of normal interest rates on dividends — to reduce the impact.
- Now give preference to gift giving: Given the possible tax increases, consider increasing the amount of annual gifts to heirs and, if necessary, consider using your entire property tax Exemption. Another option would be to create a donor-held annuity trust (GRAT), a tool that allows the transfer of fast-rising assets such as stocks without Estate and gift Tax. Although there is a possibility that burrs will become a target for policymakers and regulators, confidence can be especially attractive during periods of low interest rates.
- Start now-but take a breath: while it’s important to be prepared to respond to possible changes in the tax Code, it’s equally important not to overreact. In recent years, Federal taxes have been increased and reduced several times. The changes are incremental rather than dramatic and are weighed down along with other factors such as inflation expectations and Economic Growth prospects. It is important to have long-sightedness.
If Biden takes over and Congress gets to work, we’ll probably see those changes leaked. These changes will be significant, but they are just one piece of the puzzle when it comes to managing your assets. In our store we have a saying: do not let the tax queue shake the dog. In other words, do not take any steps to minimize taxes, which you may regret later. We recommend that you sit down with your Advisor to find out which long-term strategy is best for you.
Colin Carter and Steve Aucamp are the Managing Directors of Tiedemann Advisors, an investment advisor. This information is for illustrative and discussion purposes only. They are not intended as investment, tax, Accounting, legal or financial advice and should not be interpreted or used in this way. You can get more information on request.
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