Tax Planning and the Election Results

A new administration could mean significant changes in tax laws that affect the most affluent taxpayers.  There are several proposed tax changes that are worth highlighting and, depending on one’s personal circumstances, you should consider making proactive moves that can affect your overall wealth. The course charted by the Biden administration would have a major impact on both personal income taxes and estate taxes.

Proposed Income Tax Changes & What to Consider Now

Today the maximum individual income tax rate is 37%, while it may not seem like a huge difference, the proposed policy would increase the top marginal tax rate to 39.6%.Taxpayers may want to consider accelerating ordinary income before any changes go into effect.

On a good note, for individuals who live in high-income-tax states, the $10,000 state income tax deduction cap might be eliminated.  Eventually, when this comes into effect, it will present the opportunity to bunch together property taxes and state income taxes.

The most notable and controversial proposal pertains to the tax on capital gains.  Today, capital gains are taxed at either 0%, 15%, or 20%.  If changes are made, individuals with total income in excess of $1M could see their capital gains taxed at the ordinary income tax rates of 39.6%. Ouch!!!

While I’m not a big fan of triggering gains for the sake of triggering gains, if there is an anticipated sale of a business or other asset in the near future, you may want to accelerate the transaction before changes in tax laws take effect.

Proposed Estate Tax Changes & What to Consider Now

Today wealthy individuals can give away $11,580,000 to their heirs (couples can give a combined $23,160,000) with no estate tax consequences. If there are no changes in tax laws, this exemption is scheduled to sunset in 2025 and in 2026 it reverts back to $5M, as adjusted for inflation.  With a change in administration, there is a proposal to reduce this even further to $3,500,000 per taxpayer (or $7M combined). The heirs of anyone who passes away with assets in excess of the $3,500,000 if single or $7,000,000 for married couples would be facing a 40% tax on any dollar above that exemption.

Families with a net worth above $7M may want to consider making gifts now to take advantage of the current $11M/$23M exemptions. There are some unique ways to make gifts that still allow for a way to access those funds if necessary, in the future.

I do caution that special care should be given to making irrevocable transfers that could jeopardize your own financial well-being.  It is encouraged that you always run the numbers and understand the implications of any gifting strategy before moving forward with those strategies.

With a Democratic win of the White House, but a projected Republican control of the Senate, we do not anticipate that there will be an immediate change in either income or estate tax laws. However, after the mid-term elections in 2022 if there is a change in the house or senate majority, President-elect Biden might be able to pass major tax legislation. It is never too late to begin planning and speaking with your team of professional advisors to determine whether the proposed changes in tax laws could affect you and to determine what strategies might be appropriate for your circumstances.

Marianela Collado is the CEO and a Senior Financial Advisor at Tobias Financial Advisors, in Plantation, FL. Tobias Financial Advisors is registered as an investment advisor with the SEC. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. Information presented is believed to be factual and up to date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Professional advisors should be consulted before implementing any of the options presented.


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