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.”