It is inevitable. Change is coming for 2021 and beyond. The problem is no one knows for sure exactly what that change will be. There are several things we have a good hunch will happen, and we will discuss a few key notes. No matter, the big question is how do you plan around a hunch?
Hunch #1…C-Corp Taxation is going up. The talk is that it will rise from 21% to 28% with the imposition of a minimum 15% tax on large corporations.
Hunch #2…Estate Tax Exemption is going down. Currently, you can pass 11.7 million dollars to your heirs without estate taxes being assessed. Proposed legislation moves this number down to 3.5 million.
Hunch #3…The Step-To Rules at death may die. If you own an asset with a very low-cost basis (i.e. land, business, etc.) and you pass away, your ownership would receive a step to the current fair market value in the basis. This would void your heirs paying taxes on the sale of these assets at death. This is on the chopping block.
Hunch #4…Capital Gains rates will climb. Under the drafted proposal, any taxpayer that receives over 1 million of income may be taxed at ordinary rates. With the combined income tax rate increase, this means a jump from 23.8% to 43.4%.
Hunch #5…Income taxes are going up. The direct impact looks to affect families with more than $400,000 per year. The details….UNCLEAR???
Hunch #6…Social Security taxes are broadened. $400,000 of income is the magic number again. If your income exceeds this and you have earned income, it looks like that income will be taxed for Social Security (currently 12.4% between the employer and employee).
Hunch #7…Itemized Deductions will have limits. These may be limited to a total benefit of 28 on your taxes. Will this include mortgages and charitable gifts? It isn’t clear.
Hunch #8…Retirement Plan Savings Deductions may not be dollar for dollar. The talk is this may be limited to a 26% credit. This means those paying higher taxes would not get a 100% deduction.
Hunch #9…Gift Exemptions will be tighter. Currently, you can give $15,000 to as many people as you want and avoid gift tax. The new look would be $20,000 in total gifts for a donor and a limit of $10,000 per person. Anything above this would trigger tax.
Hunch #10…Estate Tax Planning will be different. There is a lot of push to do away with strategies that help families transfer their legacy. These are complex strategies, but the bottom line is that anything to raise revenue is on the table.
Now, how do you plan for this? Your situation is not like anyone else. There is not a cookie cutter you can buy to solve your problems. This means you need to do three things:
- Hire a tax planning quarterback. You need someone to understand your unique situation that also does proactive, holistic tax planning. This person should be willing and wanting to work with all of your professionals to get the job done.
- Build in flexibility. The one thing permanent in D.C. is that nothing is permanent in D.C. Your plan needs to fit the times, but be flexible to the political pendulum that swings back and forth.
- Act Soon! If you have waited until now to do anything, you might not be able to wait any longer. Tax planning professionals are booked and this will only get worse as things solidify in Washington.