Taxpayers with income exceeding $400,000 need to watch for potential tax changes later this year, as Democratic federal lawmakers maintain that taxing the wealthy more would raise trillions in revenue and narrow income inequality.
“What is considered ‘wealthy’ will certainly be part of the debate,” noted Sarah Allen-Anthony, managing partner of the global private client services group at Crowe in South Bend, Ind.
“Our clients are generally expecting that tax hikes are a fait accompli,” said Jose Reynoso, Tarrytown, N.Y.-based director of advanced trust and estate planning at Clarfeld Citizens Private Wealth.
“If the personal income tax changes are effective beginning in 2022, then we have all of 2021 to plan,” Reynoso said. “If the effective date is sooner, that means the options for tax minimization in 2021 may be very limited. Uncertainty around the effective date of these potential changes is the boogeyman that looms over even the best-laid plans.”
It seems likely there will be a hike in ordinary income tax rates on the wealthy to the levels they were at before tax reform, “with a top bracket of 39.6% instead of 37%,” said Joe Roberts, senior vice president and senior wealth strategist at Rockefeller Capital Management in Philadelphia. “Second, we’ll see a reduction in the estate tax exemption. Third, I think the estate tax rate will increase above the current 40% rate. Tough to say whether that’ll be a flat increase to something like 45% or if it will incorporate a tiered structure like the new ‘99.5% Act’ proposed by Sen. [Bernie] Sanders.”
Roberts also advised watching for top-bracket tax hikes in states such as California and New York. “Arizona almost doubled its top income tax bracket in 2021,” he said. “Other states may follow suit. The pandemic created significant budget deficits in high population states.”
There is also concern about state and local tax deductions and the tax rates for businesses, said Marc L. Scudillo, managing officer at EisnerAmper in Woodbridge, N.J. “Some are taking a wait-and-see approach ... but we are seeing an increase in the adjustments to financial and estate planning,” he said.
The recently introduced federal Sensible Taxation and Equity Promotion (STEP) Act could seriously alter valuation discounts, grantor trust rules and the step-up in basis for assets when clients die and leave unrealized capital gains. Roberts said these are long-standing fundamental elements of estate and gift tax planning.
On the capital gains front, “many business-owner clients are considering sales before year end,” Roberts said. “While I think the capital gains tax increase will be a difficult provision to get through Congress, some clients will face seven- and eight-figure differences selling in 2021 versus in 2022.”
Given the possible changes, there are some asset transfer moves that clients can make now. One is maximizing the current $11.7 million exemption by gifting into an irrevocable trust or taking advantage of low interest rates to shift appreciation out of the estate. Scudillo also recommends looking into life insurance for favorable tax treatment.
Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn., encourages clients who have enough to last their lifetime to gift $15,000 to their children or grandchildren annually and consider a lump-sum gift to use a portion of their current gift tax exclusion.
Having to plan can be frustrating for clients when the philosophy of tax law seems to shift with every election.
“Most of our clients recognize the need for increased revenue to fund infrastructure programs and pandemic relief,” Roberts said, but “I think everyone would like to see the depoliticization of taxes and a reduction in the past few years’ wide swings.”