We offer a summary of proposed IRS code changes and recommended tax mitigation strategies to help you get out in front of proposed changes.
As we progress further into 2021, there are still many uncertainties surrounding tax legislation. On January 5, 2021, the Georgia runoff election resulted in the Democrat party gaining two seats in the Senate.
The Senate is now split 50/50 with the tie breaking vote belonging to Vice President Harris, which presents an opportunity to pass tax legislation through budgetary reconciliation. This process is used to pass revenue and spending bills, historically, this includes tax legislation.
The timing of the inevitable tax changes is still undecided. President Biden has put the economy and coronavirus first and foremost, which would lead one to expect the tax changes to go into effect in 2022.
That being said, tax legislation has been retroactively enacted a handful of times throughout history, so taxpayers await anxiously for the final decision.
We do know, however, the proposals from the Biden tax plan. Some important areas affected are income tax rates, itemized deductions, capital gains tax rates, and estate tax issues.
It is important to get out in front of these proposed tax changes in order to properly plan for the future. Below is a summary of proposed IRS code changes and recommended tax mitigation strategies.
Income taxation
The Biden tax plan proposes to increase income tax rates for taxpayers with taxable income over $400,000 to 39.6% and an increase of the corporate tax rate to 28%. The plan also includes capping itemized deductions at 28% of their value, restoring the Pease limitation, and eliminating the SALT deduction cap of $10,000.
The following strategies are useful to mitigate these tax increases:
- Contribute to retirement plans such as company 401ks.
- Biden Tax Plan proposes a 26% credit for such contributions.
- Roth Conversions.
- Beneficial in low income/low tax year.
- Deduction bunching.
- “Bunch” deductions into a high income/high tax year to reap the most benefit.
- Companies should consider bonus depreciation on qualified purchases. Bonus depreciation is 100% expensed until 2023.
- Consider making charitable contributions by cash or stock.
- No AGI limitation on cash gifts for 2021.
- 30% AGI limitation on stock gifts.
- Qualified Charitable Deductions (QCD) to satisfy your required minimum distributions.
- Be aware of the limitation on business losses that may be reinstated in 2021.
- Consider waiving the NOL carryback in 2020 and, instead, carry any loss forward to 2021.
Capital Gains Taxation
The Biden tax plan proposes to increase capital gains tax rates to ordinary rates, possibly 39.6%, for income earners over $1,000,000. The net investment income tax of 3.8% of investment income can increase the rate to 43.4%.
The following strategies are useful to mitigate these tax increases:
- Qualified Opportunity Zone Funds
- Tax-loss harvesting
- Exchange fund
- Qualified Small Business Stock deduction
- Investment selection for tax efficiency.
- Transfer highly appreciable assets into irrevocable trusts or family partnerships.
Estate and Trust Taxation
The Biden tax plan proposes very important estate tax changes. The proposals include the reduction of the lifetime gift and estate exemption limit, increase of the estate tax rates, repeal of the step up in basis upon inheritance, and the taxation of unrealized gains over $100,000 upon death.
Although 2020 provided great opportunities to take advantage of low valuations, low interest and high exemption rates, there are still opportunities in 2021 to reduce your estate and taxes.
The following strategies are useful for estate planning:
- Establish a Grantor Retained Annuity Trust (GRAT) to effectively remove appreciation of your assets with little or no gift or estate tax implications.
- Sale to an Intentionally Defective Grantor Trust (IDGT) using a promissory note.
- Transfer highly appreciable assets to irrevocable trusts to remove assets and appreciation from your estate.
- Utilize a family partnership as a tax efficient, multi-generational strategy for estate planning.
- Annual gifts of up to $15,000 per beneficiary.
Of course, all of these are potential strategies and scenarios. Talk to your financial advisor and tax professionals to explore what is best for you.
