At Avidian Wealth, we hear from our clients frequently about pending tax law changes. If you have followed my articles over the years, you know that I often write about taxes and their impact on your estate, retirement and overall financial planning; several of these articles are referenced at the end of this piece.

With all the tax law changes we are considering as “pay for’s,” and in terms of having Americans “Pay their Fair Share,” we receive many calls from clients asking, “What should we do?” At this point, there is no immutable law and no solid guidance as to what will pass and when any changes will be effective, but we believe it is helpful to share some of our recommendations based on the ten most asked questions that we hear. But of course, before taking any action, please check with your tax and financial planning team!

  1. Will the tax law changes be retroactive to January 1, 2021? That is unknown at this point, but most tax experts believe, and also based on most precedents, that any new rates will not be effective until January 1, 2022. Part of this may be known if the Democrats end the Senate filibuster and/or get a second chance to do reconciliation before the end of the Federal fiscal year (September 30).
  2. Will my taxes be going up? For some, yes. The Democrats have said that you will not pay more in taxes if your income is less than $400k. That talking point will end up most likely not being true. We hear now that the top rate for ordinary income will rise from 37% to 39.6%. The change would apply to income in excess of $518,000 for single filers and $622,000 for those married filing jointly (note the large “marriage penalty”).
  3. Should I make more Roth Conversions since rates are going up? I love Roth Conversions and think that it may be a great idea. With higher tax rates in the future, a tax-free bucket like a Roth IRA is a great asset to have for tax-efficient retirement income planning. However, I think it is too soon to strategically convert more IRAs to Roth IRAs until we hear about the new tax rates and the effective dates. We don’t want to trigger a “landmine” by converting to an income level where a new law could be punitive.  
  4. Should I sell more appreciated stocks before capital gains rates increase? Currently, long-term capital gains (assets held over one year) are taxed at 0%, 15%, 20% or 23.8% (including the 3.8% Obamacare Tax). The current discussion is increasing that to 39.6% + 3.8% = 43.4% for those making over $1 million. Some Democrat Senators are looking at the 28% level. That being said, an investment tax tail should not “wag” the investment policy…but you may want to consider a few things:
    • If you are thinking of selling an asset, now is most likely a good time vs. next year.
    • If it is a significant gain, we would recommend you consider holding off until we know the tax rates and the effective date.
    • In terms of real estate, if you are considering a 1031 Tax-Free Exchange, you should give serious consideration to doing that sooner vs. later as Democrats are looking to eliminate 1031 Exchanges in the future. A 1031 Exchange would defer the tax and also defer the recapture of depreciation (ordinary income vs. capital gains). At this point, it is looking likely that they will eliminate 1031 Exchanges for gains greater than $500,000.
  5. Should I sell my business before the tax law changes? This is a similar question to #4 above. At Avidian, we are currently working with several clients related to Business Succession or Exit Strategies. The timing of many of these transactions is being accelerated due to potential higher tax law changes. If you are a business owner, here are some considerations:
    • Is it a good time to sell? If your business was hit hard by COVID-19, now may be the wrong time to maximize the value of your business.
    • If you sell and receive it all as a lump sum this year (vs. an installment sale), it may be a great time to get lower taxes via a lower capital gains rate and also not having to pay the 3.8% Obamacare tax (Democrats are looking to impose that tax prospectively on business sales where they are currently exempt).
    • It is a great time to talk to a business broker or investment banker to discuss the opportunity. Many private equity firms are paying very high multiples for good businesses. When interest rates go up, the deal you get may not be as lucrative.
    • Note: As the business taxes may be changing (the loss of the benefits from the Tax Cuts and Jobs Act), you should also review your business structure and tax impact before the end of 2021.
  1. What will the Estate Tax Exemption be going to (and should I do anything now)? Most discussions now are about reducing the estate tax exemption from $11.7 million per person to $3.5 million per person. So if you have an estate larger than the $3.5 million (or $7 million if married), you may want to consider a few different strategies now. Note that many of the strategies listed below could change per Bernie Sander’s “For the 99.5 Percent Act” that I discuss in some of the articles listed below. Here are some strategies to consider now with a good estate planning attorney and your entire tax and financial team:
    • Creating a Family Limited Partnership for discounting and asset protection benefits and giving away (or selling) a portion of the limited partner shares to your children or other heirs.
    • Looking into more advanced Charitable Planning. Some can give you current year tax deductions, and some can provide you with estate tax relief. Looking at using a charity as a beneficiary of your IRA and or as a recipient of your Required Minimum Distribution (RMD) via a Qualified Charitable Distribution (QCD) can also lower your taxable income and reduce the impact to higher taxes (both income and estate taxes).
    • Look into various trusts and funding strategies such as:
      • Grantor Retained Annuity Trusts (GRATs)
      • Irrevocable Life Insurance Trusts (ILITs)
      • Intentionally Defective Grantor Trusts (IDGTs)
      • Look into strategies (including some of the ideas above) for shifting some of your income to other adult family members. If you are in the highest tax bracket, perhaps moving money to your children’s tax bracket can be helpful.
      • After all the above strategies are considered, calculate your remaining estate tax liability and find the best way to have the liquidity to pay your taxes. One time-tested way is life insurance (owned in an ILIT). If you are healthy, life insurance is a great and leveraged way to have both income and estate tax-free cash to pay taxes.
  2. Will we lose the “step-up” in basis on death? Currently, when someone dies, their estate is “marked to market” or revalued to current cost as of their date of death. This is called Stepped-Up Basis. Currently, when someone inherits a taxable asset that is stepped-up, they can sell it the next day for no capital gains taxes. That is why many older Americans hold onto appreciated assets until they die. Democrats see this as a huge income generator for the Federal Government, so we may see this happen. Currently, they are discussing eliminating stepped-up basis for gains over $1 million, either by eliminating the remaining step-up, or worse, forcing a tax on that gain at death even if the property is not sold. This could be a huge deal for multi-generational businesses, farms, and ranches for those that want to keep these in the family.
  3. Will any estate planning I have done (or do this year) be clawed back? From what I have read over the last year, allowable gifts made prior to any change will be allowed to stand (and not clawed back). So now is the perfect time to review your current estate value, your financial planning goals and objectives, and to meet with your financial planning team to consider what strategies you should execute before these opportunities are lost if the law changes.
  4. Do we have to take our RMDs again this year, and what about the SECURE Act? Starting in 2021, you must take your RMDs once again. The exemption was only for 2020 due to the CARES Act. Also, coming into 2020, I thought the big issue would be the changes in the SECURE Act, especially those with large IRAs. The biggest change was the loss of the “lifetime stretch” for beneficiaries inheriting large IRAs. If you have an IRA above $1 million, please check out this linked article and linked webinar on strategies to consider given the changes in the SECURE Act.
  5. Will I get my SALT (State and Local Tax) Deductions back? This is an important one for our clients that live in states with high income taxes and/or have high property taxes. With the potential repeal of Trump’s Tax Cuts and Jobs Act, rates may be going up, but you may get back your SALT deductions. Both Republicans and many progressive Democrats oppose this, as it will be more of a tax benefit for the rich, and they need to “pay their fair share.” However, that benefit may not be as beneficial due to some offsetting legislation that may cause:
    • Higher tax rates
    • Compressed tax brackets (higher taxes at lower income levels)
    • The reimposition of “Pease Limitations” that may phase out up to 85% of your itemized deductions.

Again, much of this is unknown and speculative. But for tax geeks and policy wonks like me, this is the Super Bowl. Of course, we will be staying on top of all of these changes to let you know what is happening so that you can make the appropriate decisions to most benefit your tax and financial planning.

Also, please check out these other tax and policy related articles on our website:

  1. 2021 Discussion of Tax and Estate Tax Changes – Barron’s Live
  2. American Rescue Plan
  3. 2021 Income Tax Update – Alert
  4. Key Estate and Income Tax Planning Takeaways from the “Blue Wave” Democratic Victories
  5. Year-End Tax Planning Checklist – 2020
  6. Secure Act (and the loss of the Lifetime Stretch IRA and Changes in RMDs)
  7. Qualified Opportunity Zone (Investment Considerations and Tax Benefits)
  8. Review of Real Estate 1031 Exchanges
  9. Tax Cuts and Jobs Act (good to know and review if any “repeal”)

Additional Articles

At Avidian Wealth, we hear from our clients frequently about pending tax law changes. If…

At Avidian Wealth, we hear from our clients frequently about pending tax law changes. If…

Disclaimer:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Solutions, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions, LLC. Please remember to contact Avidian Wealth Solutions, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. Avidian Wealth Solutions, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Avidian Wealth Solutions, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Financial Planning and Investment Advice offered through Avidian Wealth Solutions (Avidian), a registered investment advisor. Avidian does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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