Susan Liu. Courtesy of the topic.
New federal proposals could lead to higher taxes. As a director of the Hongxin Wealth & Tax Planning Group in Bellevue, I spend much of my time advising my Chinese clients on the intricacies of US tax laws and how changes will affect them and their businesses.
These new tax proposals don’t just apply to foreigners and newcomers living on the East Side. They will affect everyone. Here’s a rundown of the top changes we should all be aware of:
1. Increase in the highest long-term capital gains tax rate from 20 percent to 39.6 percent – President Biden proposes increasing the long-term capital gains ratio for households with income of $ 1 million to up to 39.6 percent, and possibly putting it into effect retrospectively by April 2021.
2. Increase in the highest income tax rate from 37 percent to 39.6 percent – Biden proposes raising the highest income tax rate to 39.6 percent for single taxpayers with incomes greater than $ 452,700 and married joint taxpayers with annual incomes greater than $ 509,300.
3. Lifelong Estate and Gift Exemption Reduced from $ 11.7 million to $ 3.5 million – Inheritance and gift exemptions allow tax-free transfers to others either in the event of death or during lifetime. Not only would the individual exemption decrease significantly, but the new tax proposal would also remove the “top-up” tax base that an inheritance is currently receiving. An increase means an inheritance benefit when inheriting valuables (shares, bonds, real estate) after the death of the previous owner, as no capital gains tax has to be paid on the increase in value. Loss of this benefit would greatly increase the tax liability on valued assets passed on to the heirs.
Plan higher taxes now
While the income tax proposals target taxpayers with gross incomes above about $ 450,000, the changes in inheritance tax would affect more taxpayers and their children. Even moderately wealthy families could experience substantial increases in inheritance taxes and related income taxes. Recently, the Tax Foundation estimated that the combination of all the increases could result in marginal tax rates of up to 61 percent. Therefore, now is the time to start planning for future higher taxes. Here’s how.
- Sell now. If you are looking to sell highly valued assets in the near future, consider selling now before you potentially pay doubled capital gains tax rates.
- Move profits far into the future. Consider deferring real estate gains by reinvesting in the same type of asset using the Internal Revenue Code Section 1031 and a “like” exchange. Making a “1031 exchange” allows you to defer paying out capital gains when you sell one property and buy another. Multiple exchanges can push profits far into the future for years when you may quit work and have lower income.
Biden’s tax plan could also reduce the state inheritance tax exemption from $ 11.7 million per person and $ 23.4 million per couple to $ 3.5 million per person and $ 7 million per couple. Coupled with the significantly decreasing inheritance and gift tax exemptions, this means everyone should think about tried and tested strategies that include:
- Establish a life insurance trust to avoid inheritance taxes. Given the proposed $ 3.5 million individual inheritance tax exemption, anyone with a lot or two in the greater Seattle area – especially on the east side of Lake Washington – could face huge estate tax bills. An irrevocable life insurance trust, which is a trust that receives the income from life insurance outside of the estate and is therefore not subject to estate tax, is an effective tool for paying inheritance taxes on assets that are not included in the estate , may arise. Without a trust, the death benefit of a life insurance policy is also subject to inheritance tax, which results in more tax liabilities and fewer assets being passed on to the beneficiaries.
- Use of the annual gift tax exclusions. Taxpayers can submit up to $ 15,000 per person annually with no inheritance or income tax consequences. For example, if a couple were to start giving wealth to their children in 2021, each spouse could give up to $ 15,000 apiece to each child, transferring significant fortunes to the next generation over time.
- Charitable foundations.
Anyone with significant assets should be aware of potential changes in US tax laws and it is recommended that they consult a tax professional in preparation for these anticipated changes.
Yajuan (Susan) Liu is a director of the Hongxin Wealth & Tax Planning Group in Bellevue. She specializes in US and international tax law and provides tax advice, compliance and planning services to individuals and their businesses, with an emphasis on green card holders, Chinese investors and US citizens.