The Biden administration is pushing for a seismic shift in taxes for the wealthy, but the uncertainty of lawmaking makes picking smart tax tactics for the rest of 2021 tricky.

In the final analysis, the unknowns of Biden's tax plans make this an unusual, even frightening, year for clients and their tax planners.

“Most definitely a difficult time for planning for the high-income taxpayer,” said Thomas P. Terry, a CPA and partner at Friedman LLP in Riverhead, N.Y. “Many are looking at their portfolios for potential moves but don’t know if it’s already too late.”

Raymond Edwards, national tax director at Aspiriant in Los Angeles, added, “All we know are the president’s wishes. No new tax bill has been introduced and, with Congress deeply divided along partisan lines, it’s difficult to conclude what any final legislation might include.”

The tax changes outlined in the Biden budget will have a major impact on high-net-worth individuals—everything from income tax rates to estate exemptions to capital gains rates, said Barbara Taibi, partner in EisnerAmper’s Personal Wealth Advisors Group in Iselin, N.J. “We expect this to be the year with the largest transfer of wealth through gifting and estate planning than we’ve ever seen.”

Tony Wu, tax office managing partner at Crowe and leader of the firm’s Global Private Client Services practice in Southern California, said that some of the large-ticket items in the new Green Book of the administration’s fiscal 2022 budget tax proposals include:

• Increasing the top marginal tax rate from 37% to 39.6%.

• Taxing appreciation in assets transferred by gift or upon death with an exclusion of $1 million per person.

• Eliminating like-kind exchanges for gains exceeding $500,000.

• Eliminating the “carried interest” by taxing it as ordinary income.
 
Also proposed is taxing long-term capital gains and qualified dividends at ordinary income rates for individuals with adjusted gross income exceeding $1 million ($500,000 for those married and filing separately). The resulting highest rate would be 43.4% (39.6% plus the 3.8% net investment income tax).

Wu called this proposed increase unique in that unlike other provisions, which are generally expected to become effective on Jan. 1, this proposal would be effective retroactive to the date of the announcement (April 28, the date President Biden announced the American Families Plan).

“My guess is the 43.4% rate will not be effective as of April 2021 ... but might be higher than 20%,” said Robert Karon, Minneapolis-based managing director at CBIZ MHM.

Among the potential moves for clients is accelerating capital gain recognition on long-term assets to utilize the current tax rates, advisors said. “Those who don’t wish to sell appreciated assets may decide to make family gifts of such property this year to avoid the proposal requiring donors to recognize a capital gain at the time of transfer,” Edwards said.

“Consider Roth conversions for 2021, at some level,” Karon said. “You can lay off or reduce the taxable income with donations to a donor-advised fund and other charitable vehicles.”

For estate and gift taxes, big changes could include the estate exemption dropping to $3.5 million per person, from $11.7 million now, with rates of 45% to 65% on the excess, from 40% now. “Use up as much of your $11.7 million you still have left in 2021, as comfortable as you are with these gifts,” Karon said. Tactics could include gifts to generation-skipping trusts or spousal limited access trusts. Also make any wanted changes in irrevocable trusts this year.

Along with estate planning changes, “another consideration is your choice of entity,” Taibi said. “We need to see what happens to the C corporation rates. There’s also a proposal to treat S corp income as all subject to self-employment tax, eliminating one of the real benefits to being an S corp.”

“It is difficult to give real advice when you don’t know what the rules are,” Terry said. “The past few years have really cemented that fact that from an estate or income tax planning perspective the only thing that is permanent is change.”

“Tax legislation won’t likely pass until the later part of the year [when] there will be little time left to act on it,” Karon said. “Start preparing today.”