As with any new administration, experts are speculating about what President Biden’s proposed tax law changes may be — and what they may mean for you.
The president has made his priorities reasonably clear: raise taxes on those earning more than $400,000 per year, increase capital gains taxes and tax more of the wealth transferred after someone dies.
Some of these changes could have a significant impact on your current tax strategy and estate plan. These potential changes include:
Payroll and income taxes
- Increasing payroll and income taxes for those earning more than $400,000 by:
- Raising the tax rate on income above $400,000 from 37% to 39.6%.
- Adding a 12.4% Social Security tax on income above $400,000 — to be split evenly between employer and employee.
- Limiting itemized deductions, including charitable write-offs, for those with income over $400,000.
- Expanding tax credits for those with children by:
- Expanding the child and dependent care tax credit from a maximum of $3,000 in qualified expenses to $8,000, or $16,000 for multiple dependents, and increasing the maximum reimbursement rate from 35% to 50%.
- Increasing the child tax credit from a maximum value of $2,000 to $3,000 for children younger than 18, with a $600 bonus credit for children younger than 6.
Capital gains taxes
- Raising the long-term capital gains tax rate on those with income above $1 million from 20% to the new ordinary income tax rate — expected to be 39.6%. The 3.8% net investment income tax would still apply, making the total tax rate on this income 43.4%.
- Taxing qualified dividends at the new ordinary income tax rate for those with income above $1 million.
- Eliminating 1031 exchanges on investment property for high earners — possibly the $1 million threshold or a lower one — subjecting the investor to capital gains.
- Raising the corporate tax rate from 21% to 28%.
- Creating a 15% minimum tax on corporations with income above $100 million.
- Raising the tax rate on global intangible low-taxed income earned by foreign subsidiaries of U.S. firms from 10.5% to 21%.
- Establishing or expanding several tax credits, including a “manufacturing communities tax credit” to reduce the tax liability of businesses that experience workforce layoffs, credits to small businesses for establishing retirement savings plans and renewable energy-related tax credits.
Wealth transfer taxes
- Reducing the estate, gift and generation-skipping transfer tax exemption amounts from $11.7 million to $5.58 million or $3.5 million per person.
- Increasing the estate and gift tax rate from 40% to 45%.
- Eliminating step-up in basis for assets passing at death. It is unclear whether this would result in heirs taking assets with basis carrying over from the decedent or if death would be a realization event resulting in tax being assessed on capital gains at that time.
- Restricting the use of grantor-retained annuity trusts by increasing the minimum term to 10 years or requiring the remainder interest to have a value that equals 25% of the original assets or a dollar amount, such as $500,000, whichever is higher.
- Limiting the term of dynasty trusts by eliminating generation-skipping transfer tax exempt status after a certain number of years.
- Restricting the use of valuation discounts, including discounts for lack of marketability or lack of control, when transferring interests in family businesses.
- Capping annual exclusion gifts to $50,000 per year per donor. Currently, a person can gift up to $15,000 per year to an unlimited number of individuals.
- Eliminating the ability of trust creators to pass assets to their children through trust while retaining the income tax burden.
Considering the administration’s focus on the pandemic during the first half of 2021, it’s unlikely new tax legislation would be passed before the third, or possibly fourth, quarter. This makes it unlikely the tax law changes would be retroactive to Jan. 1. Still, retroactive application of legislation is constitutional, and at a time when the government has an increased need for tax revenue, we can’t count out the possibility. Amid this uncertainty, it’s important to consider now how these proposed changes may affect you and whether certain planning strategies are needed sooner rather than later.
Beth O’Laughlin is a partner in the law firm Warner Norcross + Judd LLP who concentrates her practice in trust and estate planning and administration, succession planning, tax matters and wealth preservation. She can be reached at firstname.lastname@example.org.