With everything happening in the country right now, next year’s taxes may not be front and center with you — or with the new administration in Washington. Nonetheless, President Joe Biden has laid out an extensive plan to revamp U.S. tax policy when there’s running room in Congress.
That may not be until year’s end, with changes possibly affecting 2022 tax returns, rather than 2021 returns. Or tax change could come sooner in an effort to rebuild revenue hard hit by some of the tax changes that may be included in the infrastructure bill. Either way, it’s never too early to consider how to prepare for the possibility that key proposals become legislation. Here’s a look at four points from Biden’s plan that could particularly impact high income earners.
The top federal income tax rate could go up
For households with taxable incomes above $400,000 and individuals with taxable incomes above $200,000, Biden’s proposal would return the top marginal tax rate to 39.6% from the current 37% set by the 2017 Tax Cuts and Jobs Act.
To position yourself for this possibility, it may be appropriate for you to speak with a financial professional about any opportunities you may have to defer income that puts you over the income limit. Bear in mind that you don’t want to shift away income or assets that you need to maintain your lifestyle.
The estate and gift tax exemption could go down
Biden’s tax plan would reduce the estate and gift tax exemption and potentially raise the top estate tax rate. The latest proposal suggested returning both exemptions and tax rate to 2009 levels, which were an estate gift tax exemption of $3.5 million and a top tax rate of 45%.
These possible revisions make now a good time to review your estate and estimate its potential tax liability. You can then identify strategies — such as gifting and trusts — that may reduce your ultimate estate value. You might also consider speaking to a Hancock Whitney Trust Advisor about planning strategies to help your heirs offset the cost of estate taxes.
Capital gains taxation could change
For taxpayers earning incomes over $1 million, long-term capital gains and qualified dividends would be taxed as ordinary income at the top rate (currently 37%, proposed to be 39.6%), rather than at the current 20% capital gains tax rate. The proposal would also eliminate the step-up in cost basis at death for capital gains taxation.
As a reminder, the step-up provision allows an inherited asset’s value for purposes of capital gains taxation to be based on its current market value, rather than its current market value minus its original value. Using the step-up in basis typically helps to minimize capital gains tax, so eliminating it could have the opposite effect.
Some taxpayers may be able to avoid capital gains on certain assets by gifting them to charity. If you net capital gains by selling property held for use in a trade or business, or for investment, a 1031 Exchange may allow you to channel gains into like-kind property and defer taxation on those gains.
The corporate income tax could increase
Biden’s proposal would increase the corporate tax rate from 21% to 28%. The proposal would also impose a 15% minimum tax on corporations’ on-book income.
Stay a step ahead
As we watch to see how these tax proposals play out in Congress, it’s wise to consider strategies that put you in the best possible position to weather whatever comes. Stay in close touch with your financial advisors — including your accountant and tax advisor — to discuss potential defensive tactics and proactive plans, and to fully understand the details of any strategy you consider. The professionals at Hancock Whitney are available to provide you with personal assistance to keep your goals on track.
The information, views, opinions, and positions expressed by the author(s), presenter(s) and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
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