Tax Planning

The numerous query marks surrounding tax planning

The COVID-19 pandemic and the resulting legislation have fundamentally changed tax planning. Both legislation that is already on the books and proposals that the Biden government may face, as well as individual lawmakers, will all have an impact on tax planners

“We don’t know if the actual legislation will be anywhere near as proposed, but something is definitely going to happen,” said Glenn DiBenedetto, CPA and director of tax planning at asset management firm New England Investment & Retirement Group. “There will likely be higher income tax rates and an adjustment in the capital gains tax rate; Accordingly, planners should consider accelerating certain profits into potentially lower tax brackets. “

“The maximum rate, which can end at 39.6%, would be imposed on taxpayers who earn more than $ 1 million,” he added. “Capital gains count towards $ 1 million, so if you have unrealized gains, consider managing income to stay below $ 1 million.”

A review of a taxpayer’s investments should aim to make the investments more tax efficient, according to DiBenedetto. “Municipal bonds are not taxable, so they don’t generate $ 1 million in revenue. If the taxpayer owns stocks with unrealized gains, it can make sense to invest them in municipal bonds. That will not achieve the capital gains that some mutual funds do. “

“By donating treasured shares to charity, an investor does not recognize a capital gain and takes it out of a potentially taxable estate,” advised DiBenedetto. “Biden’s proposals do not affect the current lifetime exception or annual exclusion. But they would likely include topping up the base so that assets of certain estates would pay capital gains tax to the extent that they exceed the unrealized gain realized on death. “

This has caused concern among small business owners, he noted: “Their businesses are their greatest asset. If it’s worth $ 10 million and they sell it in 2022, they might not get a preferential capital gains rate. I would hope that some legislation will provide a one-time exception that such profits are not included in gross income. “

Capital gains and beyond

Ending the lower capital gains ratio is the most controversial proposal for EY tax chat users, according to Brigette Chip, head of US tax chat and managing director of the Big Four. “The maximum rate is expected to rise to 39.6%, the same maximum rate that could be waived for income tax,” she said. “And working from home – which may have been one of the most popular ways to reduce income on returns in 2020 – is not deductible for employees. The Tax Cuts and Jobs Act abolished the home office deduction for employees. The self-employed and gig workers can still take it. “

Jim Guarino, executive director of the top 100 company Baker Newman Noyes, compared taxpayers’ prospects to leaflets in the Sunday papers promoting substantial savings on certain items: it’s on sale, or wait until I need it, in that Know that the selling price can be significantly higher if I wait? ‘ Some of Biden’s proposals could gain momentum. Almost everyone is confident that changes won’t take effect retrospectively as of January 1, 2021, so we have the next six months to make some decisions. Do you want to pull the trigger or wait for a large capital gain? “

One of Guarino’s clients sought advice on moving from Massachusetts to New Hampshire to avoid the tax on a highly valued position – $ 2.5 million – on a crypto asset. “We talked about changes of residence and timing. He then asked if he should sell this year as the federal impact could be four times greater than the state impact. The asset could gain an additional $ 2 million in value over the next few years, so what he would reap from holding and not selling the asset could exceed the additional tax penalty he would have had if he had sold sooner, just to avoid the higher capital gains. ”

Guarino sees tax practitioners as general practitioners for finances. “Right now it is imperative that we record our customers’ vital signs,” he said. “We need to understand their current and future tax brackets, as well as their current income and wealth. And they need to know what taxes will be sold that year and understand that they may not be sold after the year is over. “

Kay Lynn Mahue, President of Merit Financial Advisors, agreed. “Right now, most of our conversations and planning revolve around the future,” she said. “Our customers want to know what to do now because they know that tax changes are on the horizon. A number of our customers have implemented plans with trusts and gift strategies. “

As an example, she cited spouse access trusts designed to circumvent lifelong exemption. Spouses donate assets to each other in separate trusts. Since the strategy is based on full, irrevocable trusts, there must be a well-established marriage in which the parties have trust in one another. “Second and third marriages and newlyweds shouldn’t use this vehicle,” she said.

Mahue noted that a number of customers are considering selling their business.

“We have had many inquiries about sales of accounting and financial services practices,” she said. “If you have a succession plan, we still have seven months in the year and this could be the best time to do so, given the proposed capital gains tax hike. If you are dealing with late career business owners this conversation should definitely be had – don’t wait until October if there isn’t enough time to get all of your ducks in a row. They could end up paying more than double that in taxes, so that will have a huge impact on what is left to them. “

Donnie Shackleford / doncon402 – Fotolia

Rate hike ahead?

“The proposed increase in the corporate tax rate from 21% to 28% is an eye opener,” noted Robert Conzo, executive director of The Wealth Alliance. “That’s a 33% increase. And as companies start doing more business outside of the US, the government has proposed a global minimum tax to combat this. “

“Part of the debate surrounding Biden’s proposed tax hikes will be whether and to what extent a tax hike could affect economic recovery,” said Conzo. “I tell our customers that it is difficult to plan a situation that involves so many question marks. We can discuss the situation and develop concepts, but it is not advisable to come up with a plan if much is not yet clear. “

Roger Harris, President of Padgett Business Services, agreed. “When you know what the future is, it is easier to plan,” he noted. “People want to know, ‘Should I be selling things, what if the capital gain rate goes up, what if I die, will my children get a higher base?’ It’s important to know what the suggestions are, but it’s just one more thing to consider after a year or two of confusion and change. “

None of this is allowed to happen, he added: “In reality, the proposals have to pass the political test – who knows what kind of horse trade will happen? What I’m telling our offices is to plan based on what you know, but you have to be prepared for what you don’t know. “

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