Advisors say some wealthy clients could still be targeted for significant tax changes.
Although President Biden’s push for federal tax changes has so far been blocked, advisors say it would be incorrect to discount the possibility of significant changes in how wealthy clients are taxed.
“The biggest misconception may be that the push for drastic federal income tax changes for high-net-worth [taxpayers] is doomed or over,” says Gerald B. Goldberg, co-founder and CEO at GYL Financial Synergies in West Hartford, Conn. “The Build Back Better Act has hit a wall and has been pronounced ‘dead’ by some, or almost dead. But ‘almost dead,’ ain’t ‘dead.’”
Even without the proposed changes in Build Back Better, advisors have challenges to consider. For example, the current 20% capital gains tax rate can be vexing if a taxpayer expects to realize significant long-term gain from investment transactions or the sale of business or real estate, Goldberg says.
Also, according to current law, tax changes implemented by the Tax Cuts and Jobs Act of 2017 will expire at the end of 2025. Without new legislation, on January 1, 2026, the estate and gift exemption will revert to its level before the 2017 law—$5 million, adjusted for inflation.
“So planning to remove appreciated property from a high-net-worth client while the exemption ... is so high certainly is a consideration,” Goldberg says.
The estate and gift tax exemption will be $12.06 million per individual for 2022 gifts and deaths, up from $11.7 million in 2021. “This increase means that a married couple can shield a total of $24.12 million without having to pay any federal estate or gift tax,” Goldberg notes.
The gift tax exclusion also increases for 2022, the first increase in four years.
In addition to the federal tax rate, taxpayers also incur the net investment income tax on capital gains of 3.8% and the applicable capital gains tax of their respective states.
Geoff Curran, wealth advisor at Merriman in Seattle, says advisors must “plan with the information we have and provide advice that holds up under the existing and proposed tax policies.”