The rich shouldn’t be afraid of Joe Biden’s tax plans. It’s the really rich who should get nervous.
The US president will unveil a tax package on Wednesday that promises to boost the income of those who earn $ 400,000 or more a year. However, executives and professionals who earn over $ 500,000 annually already pay relatively high tax rates.
What may have far greater consequences is that Biden and the Democrats in Congress are threatening to appeal to a much richer group – the growing number of Americans with assets over tens of millions of dollars – who often pay lower tax rates than many middle-class families.
Biden, along with Bernie Sanders and other members of Congress, has started plans to end a long list of sometimes opaque deductions, exclusions, and loopholes that are the 0.1% favorites. If some of that goes away, it will change the way the very wealthy manage their portfolios and pass their wealth on to future generations.
Joe Biden
Photographer: Andrew Harrer / Bloomberg
“The most dramatic pieces are harder to understand and the ones that most people haven’t heard of,” said Laura Zwicker, chairwoman of the Private Client Services Group at Greenberg Glusker law firm in Los Angeles. “I’m afraid these are the tax bills. These really change the landscape in which planning can take place. “
The details of these rules can be far more important than the final marginal tax rate that Congress will finally agree on. “Often overlooked when focusing on the tax rate is that what wealthy people are paying is actually much lower,” said Chuck Marr, senior director of federal tax policy at the left-wing Center on Budget and Political Priorities.
Rich taxpayers
According to John Mezzanotte, CPA and managing partner of Marcum’s Greenwich, Connecticut office, the current rules basically create two types of wealthy taxpayers.
One group consists of generally high income professionals and executives who have relatively few opportunities to evade the highest normal income tax rate of 37% on their income. For those who live in states like California and New York, the overall marginal rates are around 50%. Some of them could see their taxes spike in the next year, especially if the top rate drops from 37% to 39.6% in the Obama era, as Biden previously suggested.
But the pain could be offset for some by an end to the $ 10,000 limit on state and local tax or SALT deductions imposed by the 2017 Republican Tax Act. Many Democrats are pushing for an end to the SALT line, although progressives fear it will primarily benefit the rich.
Then there’s the second group – many of Mezzanotte’s richest clients – who don’t pay those high income tax rates. That’s because they don’t make money primarily from their work. Instead, they make a living on investments, so they can pay the lower capital gains and dividends rate of 23.8%. For a typical client like this, the effective federal tax rate can be 20-22%, and some – especially those with real estate holdings – can pay even less.
Biden plans to dramatically increase the capital gains rate to bring it up to normal income tax levels for those earning $ 1 million or more. That could simply deter the rich from ever selling their profitable investments, despite the fact that the President and other Democrats have made various proposals that make it more difficult to avoid capital gains taxes.
Also Read: Biden Capital Gains Hike Would Hit Couples And Make $ 1 Million
Favorable rules
One idea is to end a rule called “step-in-base” that allows taxable gains to be wiped away from assets upon death. For years, Biden has opposed the obscure rule, suggesting that it allows the rich and their heirs to avoid taxes entirely. Biden will propose to end the rule, according to someone with knowledge of the proposition.
Ending the reinforced base would change the way the very wealthy manage their portfolios. Advisors now generally encourage clients to hold onto their most cherished assets for as long as possible in order to benefit from the rule. The heirs’ commitment to paying capital gains “would change everything we do in the planning world,” said Brad Dillon, senior wealth strategist at UBS. “It would completely change the planning calculation.”
Biden, who campaigned for the president, was less specific about plans for estate and gift taxes. The 40% surrender can easily be avoided with a variety of trust strategies. “They made Swiss cheese out of this tax,” said Marr. Reforming them is a long priority for the Democrats.
Also Read: How US Estates and Heirs are Taxed and What May Change
A bill proposed by Vermont Senator Sanders would remove most of these loopholes. For example, it would time-limit dynasty trusts, vehicles with no expiration date that are used to pass assets not only to children and grandchildren, but to future unborn generations as well.
Can Tax Avoidance Methods Survive?
While Biden does not endorse the entire Sanders bill, advisors to the rich fear that lawmakers may include some of these proposals in final legislation. This would result in the richest families in the United States failing to plan or making decades of planning difficult.
“A ‘revolution’ is not a powerful word,” said Edward Renn, partner at Withers. “I don’t think wealthy investors will be able to escape these tax hikes if they don’t do some careful planning.”
Wealthy taxpayers could find themselves squeezed between paying higher income tax rates or paying higher inheritance tax at the end of their lives. The best course of action may depend on unrecognizable factors, such as: For example, what the investment returns will look like in the future or whether the tax laws will change significantly again in a few years.
The rich could also find themselves in many more battles with the Internal Revenue Service. Biden is expected to propose a $ 80 billion boost in funding to the agency, which has been decimated by budget cuts over the past decade to encourage audits of wealthy individuals and large corporations. Last month, a study found that more than a fifth of the top 1% income is not reported to the IRS.
The question is, how many legal tax avoidance methods Biden’s tax burden can survive if it becomes law. Some strategies already discussed by consultants, such as: B. those relating to life insurance could also be dealt with in a final bill.
With big changes coming, rich Americans are trying to take advantage of the current rules by moving money now. For example, advisors and clients are considering selling assets with big profits in 2021 to avoid a higher tax rate later.
The rich scramble
For now, at least, taxpayers can continue to use trust strategies and transfer an unprecedented amount of money, more than $ 23 million for married couples, to heirs without incurring estate and gift taxes.
“People are now trying to get assets out of their lands,” Mezzanotte said.
Some families are brought to quick decisions about property transfers, sometimes to very young children, said Josh Baron, co-founder and partner of BanyanGlobal. “You have these estate planning considerations that are very immediate,” he said. “But they also have this non-financial impact on family dynamics to make sure the next generation doesn’t feel entitled.”
Compounding these investment and legal decisions is the uncertainty about what – if anything – will end up in Biden’s final legislation. Another open question is when new rules will be implemented. Most assume that a tax law will not be applied retrospectively to the beginning of the year. However, the rules could come into effect at any time in 2021, including the date the legislation is proposed or enacted. Or the legislature could make changes effective at the beginning of 2022.
“We may have all year to do this – and we may not,” said Beth Kaufman, tax attorney at Caplin & Drysdale in Washington, DC, direction where we should go right now. “
– With the support of Laura Davison
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