President Biden has unveiled proposals for significant changes to the individual tax code. The tax changes are to be substantial, and to include corporate, individual and capital gains tax rate increases, international tax changes, and estate and gift tax changes.
It’s highly likely major tax law changes are on their way, making now the perfect time to get ahead and plan accordingly. The proposed changes include:
- An extension through 2025 is proposed for the 2021 increase in the fully refundable child credit from $2,000 per child to $3,600 for children under age 6 and $3,000 for children 6 – 17.
- Extensions beyond 2021 also are proposed for the increase in the maximum Child and Dependent Tax credit from $3,000 to $8,000 ($16,000 for more than one dependent); the expansion of, and increase in, the earned income tax credit for younger workers; and the premium tax credits that reduce ACA health insurance premiums.
- The top individual federal income tax rate would rise from 37% to the pre-Trump rate of 39.6%.
- The corporate rate would rise from 21% to 28%; a 15% minimum tax would apply to corporate book income.
- American corporations’ foreign income generally would be subject to a tax of 21%.
- The top individual income tax rate would increase to 39.6%.
- Taxpayers with incomes over $1 million would pay a tax of 43.4% on capital gains.
- An extension through 2025 is proposed for the 2021 increase in the proposed for the increase in the maximum Child and Dependent Tax Credit from $3,000 to $8,000 ($16,000 for more than one dependent); the expansion of, and increase in, the earned income tax credit for younger workers; and the premium tax credits that reduce ACA health insurance premiums.
- The step-up in basis on death and carried interest loopholes would be eliminated.
- Caps would limit tax deferral for realty exchanges and deductions for excess business losses.
With this in mind, here are 4 things the financial experts at CKS Summit Group advise to do to prepare.
If you’re holding publicly traded corporate stock, you may want to switch from dividend-paying companies to growth companies. This is due to the likely trickle-down effect of the increase of the corporate tax rate, specifically on your investment portfolio. But this is only if you are not over the $1 million income threshold and can afford to hold on to the stock over time.
While the capital gain increase is projected to only affect less than 1% of American households, economists also say it will be a tax loss unless combined with the elimination of the step-up in basis at death. Those with high income typically don’t need the proceeds of their capital investments, so their best options are to:
- Sell now and take advantage of the current rates so locked-in gains will receive favorable tax treatments.
- Hold it until the next election and hope for more tax cuts.
- Hold until death.
- Use gifting strategies to get the gains into lower-income family members.
The new tax plan proposed that the top income rate be raised from 37% to 39.6% If this gets passed, there are ways to avoid paying higher taxes and you should start by being proactive in deferring your income. Additional strategies include investing in tax-exempt municipal securities over corporate bonds and performing a Roth IRA conversion. Consider tax-advantaged investments such as cash value life insurance, because if structured properly, earnings can grow and be distributed tax-free. Converting to a Roth IRA will also allow you to pay the taxes now, while they’re lower and withdraw tax-free later.
You should always have your estate plan up to date to ensure protection of your beneficiaries and proper distribution of your assets. But there are also several ways you can go about minimizing your estate taxes before the proposed changes take effect. Here are some things to consider:
- Leverage the lifetime estate and gift tax exemption.
- Maximize the annual gift exemption.
- Fund a Grantor Retained Annuity Trust (GRAT).
- Make charitable gifts.
While you can’t control the tax law changes, you can control how you prepare. Right now, the best thing to do is make proactive changes.
When it comes to effective planning and making the right decisions, talking to a professional financial advisor can be extremely beneficial. The experts at CKS Summit Group have extensive knowledge of tax laws and strategies to maximize your retirement savings. To learn more and start preparing for the future, contact CKS Summit Group today.