The tax increases proposed in President Biden’s tax plan are aimed squarely at business owners and family wealth.
The good news: You may still have time to prepare for any tax law changes that result from the proposal—still must wind its way through the legislative process and be signed into law by the President. That means Congress can make any number of changes to the proposal.
While it is possible any new tax law would be retroactive to January 1, 2021, most experts feel that it is not likely. That means that you may still be able to implement tax-smart strategies this year.
BIDEN’S TAX PLAN IS COMING AFTER FAMILY WEALTH FROM MULTIPLE ANGLES
President Biden’s tax plan has made it clear that he wants to raise tax revenue; he also has made it clear that he wants the source of the additional taxes to come from businesses and the wealthy.
With Democrats holding a narrow majority in the U.S. House of Representatives and Senate, there is no way to predict how the proposed plan will compare with tax law changes that President Biden may eventually sign into law. But, Biden’s tax plan, as currently proposed, seeks to increase taxes on family wealth from several sources:
- Increased marginal income tax rates
- Increased capital gains taxes
- Increased estate taxes after death
If you are a business owner, you will want to explore proposed changes for businesses. While no one has a crystal ball, the current administration will likely implement some tax law changes. Total U.S. Public Debt soared over 19% in 2020 as the government responded to the economic crisis created by the COVID-19 lockdown. At the end of 2020, federal debt totaled over $27 trillion. There is mounting pressure to begin to deal with the increasing deficit somehow, and President Biden’s American Families Plan aims to do just that.
BAD NEWS FOR FAMILY WEALTH TAXES
Your family’s wealth could be affected by several critical provisions of Biden’s tax plan proposal. Some of the most impacting issues include:
- Increase to the top marginal income tax rate. The proposal includes raising top rates from 37 percent to 39.6 percent. That would apply to income over $452,700 for those filing as single and head of household and $509,300 for joint filers.
- Increase to Capital Gains and Dividend tax rates. The plan calls for increased capital gain and dividend taxes for families with a taxable income above $1 million per year. Long-term capital gains and dividends would be taxed at the top ordinary income tax rate of 39.6%. Adding in the 3.8% Net Interest Income Tax (NIIT), the effective tax rate would be 43.4%. Currently, the maximum tax rate for long-term capital gains and dividends is just 20%, or 23.8%, when including NIIT.
- Increased taxes after Taxpayer(s) death. These proposed changes could carry significant tax implications for your heirs. The plan would tax unrealized gains greater than $1 million upon your death, even if your heirs have not sold the asset. The current tax code allows for a step-up in the cost basis of unrealized gains to the value on the date of death, effectively eliminating the capital gain tax liability for your heirs. Additionally, an estate tax can be due on the same asset if your estate size exceeds specific levels. According to the Tax Foundation, the combination of capital gain, NIIT and estate taxes can add up to a total tax rate of 61% on unrealized gains over $1 million. There is likely to be additional state taxes depending on your state of residence. All of these taxes add up to only a small percentage getting passed to your heirs. Suppose you owned a private business or investment real estate that has appreciated over many years. Your lifelong asset accumulation would largely be swept up in taxes when you die.
Which provisions in President Biden’s tax plan may potentially affect your family? It all depends on your unique situation. An experienced wealth manager knowledgeable in advanced tax planning for family wealth, business owners or real estate investors can help guide you in a proactive tax mitigation plan.
ANALYZE YOUR FAMILY’S TAX SITUATION
Each family could potentially be affected in different ways by any new tax law. Here are some ways to think about the potential impact. Of course, families may fit more than one of the categories below.
- High Earning Families. If you earn significantly more than $500,000, you will likely pay more in taxes under the proposed plan. Your goal could be to seek out strategies that will lower your taxable income. For example, you might investigate income deferral plans with your employer.
- Families with Large Unrealized Capital Gains. Suppose you have taxable income greater than $1 million and are sitting on significant unrealized long-term capital gains in assets. In that case, you will likely pay a much higher rate when selling the asset. For example, suppose you are a long-term employee that accumulated many shares of your employer at a low cost-basis. In that case, you will pay significantly more in capital gains taxes under the proposed plan. Owners of private businesses and appreciated real estate fall into a similar predicament. Your priority could be to look for strategies that would help reduce, defer or eliminate the capital gain tax liability. For example, you might investigate tax-loss harvesting strategies to minimize total capital gains for the tax year. You can also consider advanced charitable trust strategies that can eliminate the capital gain tax.
- Families Preparing for the Transfer of Assets. Suppose you have family assets that have appreciated significantly over the years. In that case, you may be sitting on significant unrealized capital gains that upon your death would be treated differently under the proposed tax plan. Under the proposed law, capital gains greater than $1 million would incur a tax rate as high as 43.8% in addition to potential estate and state taxes when you die. In these situations, your goal would be to search for advanced tax planning strategies designed to mitigate the tax liability for your heirs and wealth transfer strategies designed to reduce or eliminate your wealth transfer tax burden. One positive note here – lawmakers intend to build in exclusions for family-owned businesses and farms if the heirs continue to run the business.
GETTING PROFESSIONAL HELP
Proposals in President Biden’s tax plan are aimed squarely at increased taxes on family wealth, successful business owners and real estate investors. Your family’s situation is unique. Any number of the proposed tax increases can affect your family’s wealth depending on your unique situation. Contact your team of advisors to assess your position relative to the proposed changes, identify areas of concern, and develop a plan to address those concerns. An elite wealth manager can help you create a custom advanced wealth plan to minimize your tax liability. If you don’t take proactive action and plan for potential changes, you may be caught flat-footed and miss opportunities to minimize taxes.
DISCLOSURE & ACKNOWLEDGEMENT:
The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product. Rather, we are seeking to provide you with advisory services. Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment. Past performance is no guarantee of future results.