By Greg Smith, CFP®, CLU®, ChFC®, CRPS®
Mission Wealth Compliance Specialist
Since President Biden has taken office, there have many ideas around the administration's tax proposal and how to plan around it. In this article, Greg Smith has put together a list of possible proposals as well as tax planning strategies. Read on to learn more.
I recently attended two webinars presented by Ed Slott, CPA, and Robert Keebler CPA/Jonathan Blattmachr Esq./Martin Shenkman/CPA. Jonathan Blattmachr, Esq. is considered one of the most talented and creative trust attorneys in the U.S., and there were a lot of interesting ideas regarding the Biden tax proposal and how to plan around it. Also included is an enhanced list of possible proposals that may be under consideration, as well as some planning strategies.
At this point in time, we understand that nothing is definite in terms of actual legislation and effective dates, so our recommendation is to prepare clients for the fact that we don’t know what is going to happen and when, but it would be advantageous to start planning now with some “built-in” flexibility in case some of the proposals don’t materialize or are made retroactive.
Summary of the Proposed Biden Tax Legislation (and Other Ideas Being Considered)
1. Top marginal tax bracket to increase from 37% to 39.6%.
2. Corporate income tax rate to increase from 21% to 28%.
3. Repeal of Section 1031 tax deferred exchanges for real estate.
4. Proposal to eliminate preferential rate for Long-Term Capital Gains and qualified dividends on income over $1M. Three possibilities:
- Make law retroactive to 1/1/2021 (very unlikely).
- Effective date is set sometime during 2021.
- Effective date is 1/1/2022.
5. Elimination of step-up basis at death (IRS Section 1014).
6. Gain recognition at death on inherited assets (very unlikely).
7. Reinstatement of the Pease Limitation on itemized deductions.
8. Charitable deductions limited to 28%.
9. Reduction of estate exemption to $5M or President Obama’s proposal to return to 2009 levels of $3.5M with a 45% rate.
10. Grantor Retained Annuity Trust (GRAT) Changes
- Minimum 10-year term.
- Maximum term = life expectancy of annuitant plus 10 years.
- Remainder interest not less than greater of 25% of trust FMV or $500,000.
11. Grantor Trust Changes
- Grantor trust assets to be included in estate of grantor.
- Distributions from grantor trusts to be included in grantor’s estate.
- Assets of grantor trust when trust changes to non-grantor trust – to be included in estate.
12. Goods and Services Tax (GST) Changes
- Qualifying trust must terminate within 50 years of creation (Bernie Sanders) or 90 years of creation (President Obama).
13. Annual Gift Exclusion
- $10,000 limit per donee and $20,000 limit per donor (Bernie Sanders).
- $14,000 limit per donee and $50,000 limit per donor (President Obama).
Tips for Planning Around the Biden Tax Proposals
1. Take Qualified Charitable Distributions (QCDs) Early in the Year. For our clients that are charitably inclined, this is a good way to offset their required minimum distribution (RMD) for 2021. A QCD cannot be taken AFTER an RMD has been taken in order to offset that RMD for tax purposes. So if a client has already taken a RMD early in the year or take monthly distributions beginning in January and then decide to do a QCD later in the year after the RMD has already been taken, you cannot offset the RMD for tax purposes. Since the first dollars out of an IRA go towards satisfying the RMD, it’s best to do the QCD early in the year or at the same time RMD is taken.
2. Postpone RMD Until November.
If our clients do not need the RMD funds, it’s best to delay taking until November. It is possible more legislation will be introduced that would exempt RMDs for 2021 (similar to year 2020) in order to provide continuing financial relief during Covid.
3. Take Advantage of Low Tax Rates. There may be a 1-year time window to take advantage of our current low tax rates. Consider IRA withdrawals and Roth conversions. The longer Congress waits to increase taxes, the less likely it will be made retroactive. It’s unlikely there will be any big tax changes soon and anything extreme will not likely pass.
4. Review Wills and Durable Powers of Attorney. Have provisions been made for digital assets? Would the executor or attorney-in-fact have access to client’s online passwords and account? Do you have a typed list of all bank accounts and passwords?
5. Durable Powers of Attorney.
Many of these documents are generic in the powers they grant. Consider adding special powers such as (1) power to pay life insurance premiums, (2) power to take RMD, (3) power to access digital assets, (4) power to change IRA beneficiaries.
6. Considering Selling Commercial Real Estate?
It is best to do the sale in 2021, while section 1031 still exists and take advantage of tax deferred exchange. Section 1031 treatment for all assets other than real estate was eliminated in 2017.
7. Considering Selling a Business? Do it in 2021. And take advantage of the maximum 20% capital gain rate. Or contribute the asset to a CRT (Charitable Remainder Trust). The CRT could be structured as a NIMCRUT (Net Income with Makeup Charitable Remainder Unitrust) in order to postpone income recognition for up to 20 years.
8. Accelerate Capital Gain Recognition. For taxpayers with income over $1M, proposals being considered to increase the long-term capital gains tax (LTCG) rate to 39.6%. For taxpayers living in high income tax states (like CA and NY), total LTCG tax could well exceed 50%.
9. Accelerate Charitable Deductions in 2021. The Biden tax plan proposes to limit charitable deductions to 28%, and reinstate the Pease limitation.
10. Consider Large Gifts Using Lifetime Exemption. “Use it or lose it.” The exemption amount may be reduced to $5M or even $3.5M. It is unknown at this time what will occur prior to the sunset provisions in 2026. We can run a Money Guide Pro analysis with clients to determine how much they can afford to give away and to maximize use of the lifetime exemption comfortably.
How We Can Help
At Mission Wealth, we help you explore the most cost-effective solutions to help cover a number of possibilities. We have no proprietary products to sell and no quotas to fill. We simply offer independent, objective advice that serves your best interests. We realize that taxes may be one of your largest ongoing expenses. We will bring tax reduction strategies to you and coordinate with your CPA on implementation. We also manage your investment portfolio in a tax-efficient manner.
DISCLOSURES: For informational and discussion purposes. These concepts should be discussed with your tax, financial and legal representatives prior to implementation.
OUR TAX REVIEWS ARE INTENDED TO COMPLEMENT YOUR ACCOUNTANT’S WORK. IT SHOULD NOT BE USED AS A SUBSTITUTE TO TAX PLANNING AND/OR TAX PROJECTIONS FROM YOUR TAX PROFESSIONAL.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISOR.