Now is the Time to Prepare for Potentially Higher Taxes on the Wealthy By Scott Montgomery

On April 28, 2021, President Biden addressed the nation and outlined his plans for reforming the U.S. tax code to help pay for a proposed $2.3 trillion American Jobs Plan and a more recently unveiled $1.8 trillion American Families Plan. Whether the provisions included in the president’s plans will ultimately pass into law remains to be seen. What we do know is that high-net-worth individuals and entrepreneurs should take the time now to prepare their assets, businesses, and estates for the prospect of higher taxes in the future.

Biden’s Tax Plans 

Some of the provisions in Biden’s plan that affect wealthy taxpayers include:

• Increasing the top federal income tax rate from 37 percent to 39.6 percent (plus the 3.8 percent Medicare tax), which was the highest rate in effect before the Trump Tax Cuts and Jobs Act (TCJA);
• Increasing the tax rate on long-term capital gains and qualified dividends from 20 percent to 39.6 percent (plus the additional 3.8 Medicare tax) for taxpayers earning more than $1 million;
• Eliminating the practice of stepping up the tax basis of inherited gains exceeding $1 million (or $2.5 million per couple when combined with existing real estate exemptions) and ensuring gains are taxes on property that is not donated to charity;
• Eliminating the carried interest loophole that allows managers of hedge funds and partnerships to pay lower ordinary tax rates on their income;
• Eliminating the tax-deferral benefits of 1031 like-kind exchanges of real property that results in a gain of more than $500,000;
• Making permanent the current limitation in place through 2026 that restricts non-corporate taxpayers from claiming large, excess business losses;
• Increasing the IRS’s 2022 budget with an additional $1.2 billion allocated to enforce the tax laws and audit tax returns specifically filed by corporations, high-net-worth individuals and estates; and
• Requiring financial institutions to report to the IRS information on clients’ account flows, including earnings from investments and business activity, in the same manner employers report employee wages.

While the president’s proposals narrowly focus on increasing taxes on high-net-worth families, the one saving grace for the wealthy is the absence of any calls to reduce the current estate tax exemption of $11.7 million for individuals and $23.4 million for married couples filing joint tax returns. One can assume that these very generous exemptions will remain in place until 2026 when they are set to return to their pre-2018 levels of $5.49 million for individuals and 11 million for married couples filing jointly. However, Biden’s calls to eliminate the step-up in tax basis of assets inherited at death means that individuals must still review their existing estate plans and consider restructuring assets to minimize tax liabilities.

Planning Opportunities 

Estate planning is rarely a one-and-done activity. With ongoing changes to the tax laws and individuals’ unique circumstances, annual reviews are critical for maximizing tax efficiency and protect accumulated wealth for future generations. Following are just some of the strategies wealthy taxpayers should consider and begin discussing with their trusted financial advisors now with an eye toward higher taxes in the future:

• Take advantage of specific types of trusts, including Beneficiary Defective Income Trusts (BDITs) or Spousal Lifetime Access Trusts (SLATs) if you are married, to transfer highly valued and appreciable assets on a tax-advantaged basis to beneficiaries without increasing exposure to estate tax.
• Gift highly appreciated assets to your children, essentially removing them from your taxable estate.
• Consider converting a traditional IRA to a Roth IRA and immediately paying tax on the transferred amount at today’s low rates while providing you with the benefit of future tax-free withdrawals in retirement.
• Consider the tax and liquidity benefits of cash-value life insurance to accumulate assets for your retirement.
• Accelerate the sale of a business and/or long-held, highly appreciated assets to take advantage of the current capital gains rates or donate assets to charity to claim a tax deduction.
• Accelerate income into 2021 to take advantage of today’s low income-tax rates and delay deductions until 2022 when they may be used to offset taxable income. With proposed increases to both federal income tax rate and taxes paid on capital gains and qualified dividends, wealthy individuals may be subject to a top federal rate of 43.4 percent, plus any state income tax liabilities, depending on where they live.

While there is no one solution that will apply equally to everyone’s unique circumstances, it is critical that affluent families begin the planning process now to avoid significant tax-liability surprises in the future.

About the Author: Scott Montgomery is a director and financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services.  For more information, call (954) 712-8888 or email info@provweath.com.

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888. 

Scott Montgomery is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. 

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors. This material is provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Life insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Life insurance policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims-paying ability of the insurance company. 

To learn more about Provenance Wealth Advisors estate planning services click here or contact us at info@provwealth.com

Posted on June 9, 2021