Are You Ready? Key Planning Opportunities in Anticipation of Upcoming Tax Changes

As we move closer to year end, the possibility of the sweeping tax law changes we’ve notified you about become a nearer possibility. Planning is somewhat challenging since we still do not know exactly what those law changes will look like.

However, one thing we are relatively sure of is that changes are coming with a particular impact on corporations and wealthy individuals.

We are light on the details as the House, Senate and White House continue to negotiate the specifics. Nevertheless, since the actual changes are anticipated to come in the next few weeks, we suggest that you begin contemplating some important tax planning ideas now and not wait until the law becomes final when the timeframe to react may be limited.

Below are some thoughts to consider today, although note that some items mentioned below are based on the draft bill released by the House Ways and Means Committee on September 13th – all, some, or none of which may actually be included in a final bill. Also, we will not know the effective dates of any provision changes until the bill is passed, so planning now for what is to come is the best course of action.

Increasing individual tax rates

Long-discussed is a proposed increase in the top ordinary income tax rate from 37% to 39.6% effective as of January 1, 2022, as well as a 3% surtax on taxpayers with income over $5,000,000. The proposal would also increase the tax rate on long-term capital gains and qualified dividends from 20% to 25%.

Considerations

• Accelerate ordinary income into 2021 when the rates are lower, as opposed to 2022 and beyond, especially for those with incomes in excess of $5,000,000 as this strategy could result in a potential tax saving of over 5%.
• Holding appreciated assets in a tax-deferred account may be beneficial in delaying exposure to the increased capital gains rates.
• Consider converting qualified retirement plan assets or regular IRAs into ROTH IRAs. This should allow taxpayers to take advantage of the current year lower tax rate while the assets appreciate tax-free in the future, and allow the account owner to defer taking minimum distributions.
• If possible, defer deductions, such as charitable contributions, until 2022 when they will be more valuable.
• Hold off on paying state and local income taxes and real estate taxes until 2022. Currently, state and local taxes are subject to an annual $10,000 cap (SALT limit). While lifting the SALT cap was not included in the original proposal, politicians from several high tax states, such as New York and New Jersey, are threatening to not vote for any bill that does not contain SALT relief.

Estate and Gift tax changes

Proposed is the reduction of the estate and gift tax lifetime exclusion from the current and historically high $11,700,000 to approximately $6,000,000 (both amounts are adjusted for inflation) effective January 1, 2022. Also discussed is the disallowance of minority interest valuation discounts for entities that hold passive investments. Additionally, proposed are several provisions that would substantially curtail the benefits of certain types of grantor trusts, including currently existing trusts as well as those created in the future.

Considerations

• If you have not utilized your lifetime exclusion, you may have a very short window to save your heirs substantial estate tax exposure by taking action before December 31st. After that date, a taxpayer and spouse could lose the ability to give away millions free of estate and gift tax by making large gifts under the current exclusion amount. This, of course, must be done factoring your financial capacity, economic well-being and future comfort.
• If contemplating the action above, consider doing it in a manner that you can maximize your remaining exclusion by utilizing minority discounts.
• Put in place and fund irrevocable grantor trusts or change the terms of existing trusts, if possible, to help effectuate any planning contemplated above.
• Consider prefunding certain types of existing grantor trusts including irrevocable life insurance trusts.

Entity taxation

Numerous proposed changes would impact businesses, the most significant of which is an increase of the top corporate tax rate from 21% to 26.5%. There are also many suggested provisions affecting the taxation of foreign income.

Considerations

• Here we go again – back to examining “choice of entity,” as we did several years ago when the corporate rate was lowered. Is it more beneficial to be a C Corporation, a Subchapter S Corporation or a partnership? The proposed rate increase is still substantially lower than the highest marginal rate applicable to individuals. This may incentivize the use of a C corporation structure if earnings are expected to be retained and therefore not subject to a second level of tax at the shareholder level.
• Taxpayers with significant qualified business income should accelerate income in 2021 to take advantage of the unlimited QBI deduction.

As we’ve said before, we cannot predict the future, but some changes are coming. Proactively planning now may result in substantial tax savings for you, your family and your business. We’ll continue to monitor the negotiations in Washington and update you as the changes in the tax landscape become clearer. In the meantime, if you have questions regarding the above considerations and what you can do to position yourself to act quickly in the event some of these proposals come to fruition, please contact your Anchin Relationship Partner.