In line with our desire to make your financial life less stressful, we do our best to share those planning items with you that are most relevant for your situation. We find that when we share the kitchen sink it’s easy to get overwhelmed and forget the important points.
However, behind the scenes we are considering and reviewing many different legislative proposals and potential planning opportunities that may apply to your situation. With so many potentially big changes on the horizon, and the potential sunset of some provisions from the Tax Cuts and Jobs Act in 2025 we thought we would share a few of the biggest proposals and potential opportunities we are reviewing.
Don’t hesitate to reach out if you have any questions, but rest assured that we will continue to monitor these proposals and bring you those items during our reviews that we think are relevant in your planning.
Remember to upload your latest tax return and estate planning documents. If it is easier for you, you can also connect us with your accountants and attorneys to get these documents as these help us have more information about your situation.
Please also remember that while we believe tax strategy is an essential part of your financial world, we do always recommend you review these recommendations with your tax and estate planning professionals.
1)Limited Step-Up in Basis at Death
- The Proposal: The untaxed gains on investments held at death – such as stock, land or a home – would likely be taxed, potentially up to 39.6%. In the proposal there is an exemption of $1 million per individual, and $250,000 more for a home. The total exemption would be doubled for married couples up to $2.5 million of gains.
Under our current law, when a property owner dies, the cost basis of an asset passed to a beneficiary is “stepped up.” This means the present value of the asset becomes the new basis. That means for many of you if you sell or re-allocate any asset immediately after death, you don’t owe capital gains tax. If you compare our current law to the proposal above, you can see this might be one of the most impactful changes for you.
This is probably the least likely scenario, although very impactful if it happens. We are continuing to monitor and don’t recommend any changes until we have more clarity, but here are a few items we would consider if the proposal passed.
- Actions to Consider:
- Life Insurance to create estate liquidity and for tax payments.
- Utilize More Tax Trading During One’s Lifetime by doing more tax-loss trading, gain harvesting and basis management during life.
- Evaluate assets to be left to beneficiaries and set up a strategy incorporating potential taxation.
- Consider charitable gifts with highly appreciated stocks.
- Transfer highly appreciated assets to the spouse and leave assets with little appreciation to the children.
2) Decreasing Lifetime Exclusion
- The Proposal: The Tax Cuts and Jobs Act doubled the estate tax exemption from $5 million to $10 million (adjust annually for inflation) starting in 2019. The exemption is up to $11.7 million per person in 2021.
Biden’s tax proposal and others being discussed could potentially bring the exemption down to $3 – $5 million. If nothing happens at this point the higher tax exemption from the TCJA will sunset after 2024, and the exemption will go back down to $5 million (plus inflation) per individual.
- Actions to Consider:
- Use Your Large Gift Exemption now because the IRS announced at the end of 2020 that there would be no retroactive tax on gifts made using the exemption prior to years should the exemption be reduced.
- Consider Gifting or Transferring assets out of your estate when interest rates and asset values are low.
- Gift Before Estate Laws Change to prevent planning mistakes or challenges that can come if your are forced to rush the process.
- Consider Charitable Gifting Strategies and other advanced gifting strategies, including trusts.
- Gift Assets Sooner instead of waiting until death because they appreciate in value.
3) Elimination of the Stretch IRA
- This is a planning item we have discussed with many of you at this point, as this is past the proposal stage and has been implemented, but it’s worth remembering because it has such an impact from a legacy planning standpoint if you have a large IRA. The bill requires liquidations within 10 years from a newly inherited, non-spousal IRA, that means you can no longer stretch out these distributions over your lifetime. This can also have impacts when trusts are listed as beneficiaries, so it’s worth double checking.
- Actions to Consider:
- Draw Down Large Traditional IRA Balances during lower income years and pay taxes on the IRA money now.
- Annual Partial Roth Conversions are becoming even more important to analyze and review.
- Roth Retirement Assets are more desirable from a legacy standpoint, and it makes sense to consider leaving those for non-spouse beneficiaries.
- Life Insurance is becoming another tool to replace the stretch IRA and/or pay income taxes.
- Consider Multiple Beneficiaries for IRA Accounts or whether IRAs should be left to lower tax beneficiaries.
- Consider Charitable Beneficiaries including charitable remainder trusts if you are charitably inclined.
4) Raising the Top Ordinary Income Rates
- The Proposal: Biden’s tax proposal raises the top tax rate to 39.6% from 37%. This change would likely apply to those who earn more than $400,000. If you remember back, this was the rate before the TCJA in 2017.
- Actions to Consider:
- Tax Diversification or Deferral through Roth IRAs, annuities, 529 plans, or Health Savings Accounts.
- Tax Bracket Management by taking advantage of low-income years to take IRA distributions, sell appreciated stock, or do Roth Conversions
- Tax Efficient Investing by investing in very tax efficient separate accounts, tax-loss harvesting, or maximizing retirement contributions, and looking at asset location when investing assets. For example, putting individual stocks, ETF’s and Muni bonds into taxable investing and more tactical, high turnover, or less efficient investments into qualified investments.
- Cash Value life Insurance we are once again looking more heavily at life insurance as a tool for tax-free growth and death benefits.
5) Capital Gains – $1 M+ Tax at Ordinary Income Rates
- The Proposal: As you may be aware Biden’s proposal is looking at taxing long-term capital gains and dividends at his higher top ordinary income rate of 39.6% – nearly double the current top rate of 20% on such income. This is a significant jump from the current capital gains tax of 23.8% for (20% plus 3.8% Net Investment Income Tax) to 43.4%.
- Actions to Consider:
- Increasing Contributions into 401(k)’s, IRA’s, defined benefit/cash balance plans and Roth Accounts.
- Leverage Property & Investments by borrowing against appreciated property & lending back, instead of taking withdrawals.
- Accelerating Sales & Income into 2021 so that you don’t have these higher incomes in future years.
- Tax Efficient Investing by investing in very tax efficient separate accounts, tax-loss harvesting, or maximizing retirement contributions, and looking at asset location when investing assets. For example, putting individual stocks, ETF’s and Muni bonds into taxable investing and more tactical, high turnover, or less efficient investments into qualified investments.
As part of our process, we have many tools to help you review different scenarios and make thoughtful, pro-active decisions that optimize your planning. We hope that this was helpful and informative.
All the best,
Kerry Meath-Sinkin
CFP®, AIF®, Partner & Wealth Advisor
Robert Meath
Founder, Partner & Wealth Advisor
