With the recent changes in administration and instability of the economy due to the ongoing uncertainty of the Covid-19pandemic, new tax laws are being proposed that could potentially impact your financial health and wellbeing.
Staying abreast of these potential changes will allow you to be proactively prepared to make adjustments to your plan if, and or when, they might become law. Alterations of current taxation status and introducing entirely new laws may take a toll on an individual’s ability to fully fund their retirement accounts to maximize wealth later in life, the taxes that might be owed upon receiving an inheritance, and significantly raise taxes for corporations and high-income earners. In this blog we will discuss 6 proposed tax law changes that appear likely to become law in some form or another and how understanding the impact they may have on your particular situation will allow you to proactively prepare for what the future may have in store.
Educating yourself on new proposed tax laws and alterations is important when it comes to being properly prepared at an early stage in your financial growth and flourishment. Having the ability to properly coordinate a plan to mitigate the impact of these changes is imperative when it comes to maximizing your financial potential.
1) Proposal to Restore the 39.6% marginal tax rate This proposal would apply to income over $400,000. Although the threshold by filing status is still unclear, this could result in a significant impact to high-income earners. Restoring this marginal tax bracket will impact married couples filing jointly and individuals with higher incomes. Even though this proposal may impose a new problem to couples and individuals generating larger incomes, there are proactive measures that can be integrated into your financial planning to lessen the impact. In preparation for a restoration of this marginal bracket individuals/business owners should explore options like Roth conversions, Next Generation Pension Plans, gain harvesting, deferred loss harvesting, deferring business expenses and cutting-edge charitable strategies.
2) 39.6% Long Term Capital Gains Tax for “households” making over $1 million A potential increasing capital gains tax for “households” making over $1 million dollars could significantly impact many wealthy individuals; especially when you consider the additional 3.8% surcharge that will also be levied for high-income earners. This proposal could lower the amount of income generated from investments, retirement planning, capital sales and much more. If we think a bit deeper, this will also likely encourage longer holding periods for the fear of “exit cost” increases. This proposed increase in long-term gains tax, if enacted, can cause a massive re-allocation of capital. As such, it might become more important than ever for individuals to consider advanced planning strategies that can reduce/eliminate the tax on the gain of considerably appreciated assets when they are sold.
3) Eliminate the “Step-Up” in basis upon death in favor of recognizing gain at death This would create forced recognition of unrealized gains when assets are transferred at death. Inheritance in some cases, may only realize an exemption of $ 1 million for individuals and $ 2,500,000 per couple (including principal residence). While this proposition claims to offer protection so that family-owned businesses and farms will not have to pay taxes when given to their heirs to continue to run the business, it could create significant tax liability for many wealthy individuals. For example, consider a decedent with an asset valued at $3 million with a cost basis of $0 and a 40% income rate. The current law would provide $ 3 million net to the family upon death. However, if the proposed law is placed into effect, $2 million of the value of the asset would be taxed at 40% thus losing $800,000 to taxes. As you can see, the impact of this proposal would, over time, have a significant impact on multi-generational wealth and would require some very creative tax planning to recapture the money that would be lost to taxes. 4) Proposal to Expand Social Security Tax President Biden’s campaign tax policy proposals imply expanding the social security tax to any earned income over $400,000 while retaining the established 12.4% tax rate split equally between employers and employees. This would create a tax-free gap between the Social Security base (presently around $142,800) and the $400,000 threshold after which, the tax would then apply once again. Some solutions for business owners if the Social Security tax is expanded may be the use of S-corporation dividends. Remember, S-corporation dividends are NOT subject to employment taxes. Reorganizing as a C-Corporation offers another solution and also considering alternative forms of compensation such as Options or deferred compensation.
5) Proposal to Cap Itemized Deductions to a 28% benefit If a cap is enforced on the tax-benefits of itemized deductions becomes a law, it could impact your retirement plan funding. Consider, for example, an elderly couple on the verge of retirement who generate roughly $400,000 of income and therefore have a marginal tax bracket of 32%. Under the proposed legislation, if one spouse contributes $20,000 to their 401k, the tax benefits of this deduction could be limited to 28% or only $5,600.In circumstances like this, when applied to retirement planning, individuals may benefit from utilizing a Roth vehicle or other types of wealth management strategies that allow for tax-free distribution.
6) Business Income Tax Increase Another Biden proposed tax law could potentially increase corporate tax rates from 21% to 28%. If this proposal were to be enacted, and the 199A QBID deduction retained, business owners may need to re-access how their business entity is structured for maximal tax benefits.
In closing, what can we take away from all this? While we have no idea what the final tax law might be, we need to understand that tax laws are constantly changing, for better or for worse. Being proactively prepared, by working with an advanced tax planning specialist and utilizing certain strategies such as next generation pension plans, charitable strategies and Roth vehicles can allow you to mitigate the effect these changes may impose on your financial wellbeing. It is imperative, as an individual, married couple, high-income earner, or business owner to be familiar with these potential changes.
Here at Strategic Lifelines, we specialize in helping individuals and business owners recapture money normally lost to taxes and leverage it into multi-generational wealth. Don’t waste time “pulling your hair out” trying to establish a plan to counteract these potential tax changes. As your proactive source for the changing tax landscape, we can help you navigate your way through these uncertain times knowing you are doing everything possible to stay ahead in the “tax game”. Working with individuals and business owners at all stages of planning, we can help put your mind at ease and maximize your financial potential. The Covid-19 pandemic has instilled economic, financial, and physical fear in the world. Contact anyone on our experienced team so we can help alleviate some of that financial fear of the unseen future!