I am currently reviewing some of the pending tax proposals being presented. Again, these are proposals and most of them will change before enacted.
It occurred to me as I was reviewing the details of the tax proposals, how many changes I have seen over my long planning career. It made me think of how many times clients (YOU AND ME) had to update our plans at our cost. It is amazing the disregard the government has for the U.S. citizen in making this system easier to work with. I can understand why so many citizens put off planning, or just get tired of updating. Unfortunately, this is the reality of the tax system and the changing of administrations.
In 2017 we had a major income tax change which in most cases helped many citizens lower their taxes. It was easy to understand and it did what it was suppose to do, stimulated the economy along with increasing public confidence.
It also gave estate owners a path to plan to preservation their estates. The tax policy was working very well and our government tax coffers where growing.
Pending Tax Changes- Again These are only proposals!
The Green Book 2021
Sr. Van Hollen (Sensible Taxation and Equity Promotion (STEP) and other plan such as the American Families Plan, and the “For the 99.5% Act (Bernie Sauders)”
Income Tax Changes
- Top income tax rates 37%-39.6% effective January 2022; > $509,300 for married, and $452,700 for single
- Restrict tax deferral, “like-kind exchanges” (swaps of real estate that avoid current taxation that a sale would tigger
- Capital Gains might double-(sale of stock, investment real estate, etc. ) qualified dividend with incomes over $1million taxed at ordinary rates. This could be triggered for gains after April 28, 2021
Social Security Taxes
- To coordinate the net investment income and self employment taxes, so unlike current law, a company could pay the owner a reasonable salary or guananteed payment, the overage became federal taxable profits, but not defined as payroll taxes. This was assuming that the salary, and withdrawals were reasonable compensation .
The proposal is to tax pass-through business income (e.g. S Corps, limited liability companies, partnership) of high income taxpayers will be subject to either the net investment income tax or the social security taxes.
Audits from the IRS: $80 BILLION increase over 10 years for IRS for audits.
Estate and gift tax:
- Bernie Sanders proposal (For the 99.5% Act) calls for a return to lower estate and gift tax exemptions as well as significant changes to the rules on GRATs and grantor trusts
- Most dramatic: Biden’s plan is to make the transfers of property by Gift, and on assets owned at death (as of January 1, 2022) triggering events for capital gains taxes. The gain is measured by the date of gift or death fair market value less basis.
- Exclusions: transfer at death to a US spouse.
So there are other potential changes coming down the pike and we’ll have to wait and see. Here is the bottom line:
Split Interest Gifts: Grat’s ; watch for developments
Grantor Trusts: At Grantor’s death or trust is no longer revocable
If you are a business owner with wealth in your business and you have not done any planning, it may be a good time to start thinking about a certified appraisal of your business and your holdings. Also, you might want to start thinking about what your goals would be for passing your estate assets. It’s to early to tell where the wind will blow and how you will be affected by any change, but it is not too soon to think of what you wish to accomplish in your estate and business planning.
As I look some of the potential changes, Life Insurance Planning will become more significant in paying for the additional liabilities of passing your estate assets either by gift or death.
To help you with your planning, I would like to offer to you my newly published Ebook called,”Unlocking Your Business DNA”. In the book I cover strategies I have used with business owners for over 50 years with powerful strategies to create growth and profits in your business and also create an amazing amount of leisure time.
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More to come… stay tuned.