Potential Tax Changes & Their Implications

Over the last six months, a good deal of our time has been spent studying the implications of the many tax proposals that were circulating. From the American Jobs Plan, the Made in America Plan, the 99.5% Tax Act, and others, it is still possible that some tax plan will be passed soon. The critical task for us is to better understand what the implications are and what, if anything, should be done ahead of their passage.

We must accept that funding at the level needed to get us through COVID and now infrastructure improvements will require tax increases. It would seem that Congress was looking to fund the proposed plans using sales tax (example, gasoline tax) but this would impact those earning less than what President Biden promised he would target. There seems to be some agreement on taxing businesses at 25% rather than the current 21% (though 29% is still being discussed). Close to 140 countries agreed in October on a global minimum corporate tax rate of 15% targeting the largest international firms, so that’s already baked in. Other items being considered have large implications for those who earn over $500K a year and who have a large taxable gain (home or portfolio). Those expecting to sell a business or a home with a large gain may need to prepare for alternative ways to lower their taxable income or accept the large one-time tax liability.

Current proposals include long-term capital gains taxed at 43.4% from the current maximum of 23.8% (plus state) for those in the higher tax brackets. A change in the step-up in basis on death is also likely since it makes sense with increased capital gains taxes. This is expected to apply to couples with income over $1M (singles are likely to be at $500K income). Keep in mind, if you sell your home or your business you may find yourself in these higher brackets and therefore pay taxes well over 50% of the gain in one year, making it very important to plan for single-year large capital gain realization (for the time being, there is no exception for single-year events).

These proposed changes encourage us all to annually consider the use of Roth conversions, 401K Roth contributions, charitable planning (Donor Advised funds) and estate planning strategies.

Edi Alvarez, CFP®


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