What Actions High Net Worth Individuals May Want To Consider
In May 2021, the U.S. Treasury Department released its Green Book providing descriptions and explanations of its Fiscal Year 2022 Revenue Proposals. Several of these could dramatically affect tax liabilities for high-net-worth individuals. Here’s what wealthy taxpayers may want to consider, when planning for how to minimize tax impacts for their families and heirs.
Current Federal Gift & Estate Tax Law
Under existing federal gift and estate tax law, individuals can give up to $11.7 million (couples, $23.4 million), tax free during life or upon death, without triggering the death tax. This is the highest exemption amount in history. However, it is currently set to decrease significantly in 2026 to approximately $6 million, at which point gifts exceeding this amount will trigger the gift or estate tax for an amount equal to approximately 40% of the value of transferred assets.
Currently, lifetime gifts and bequests do not trigger income taxes for recipients, who receive them on a carryover basis, preserving unrealized gains. Assets passed along at death receive a basis step-up to fair market value, essentially wiping out unrealized gains in assets owned.
Proposed Changes to Tax Law Affecting Wealthy Individuals in 2022
For 2022, the administration is proposing to increase the top income tax rate for individuals from 37% to 39.6%, applicable to incomes over $452,700 for individuals or $509,300 for joint filers. Brackets will then reset annually, based on inflation. On top of this, the administration is proposing to tax long-term capital gains and qualified dividends at ordinary income rates for those with adjusted gross incomes (AGI) of over $1 million, adding up to another 3.8% net investment income tax, for a top potential rate of 43.4%. Importantly, this change would be considered effective as of April 2021, retroactive from the enactment date.
Finally, under the proposed changes, gifts and asset transfers at death would be treated as income realization as if the donor sold the property, realizing any gain or loss; repurchased it; and then gifted identical replacement property. This means that any previous unrealized gains would be passed along to donors who would be responsible for paying income taxes on the gains. This would also apply to property distributed through trusts. These changes would not apply to asset transfers to charities.
Every individual could exclude $1 million of “phantom gains” from recognition, and transfers to a living spouse would not immediately trigger gain recognition. Instead, the spouse would assume the assets on a carryover basis with tax liability triggered at the time of their own death or time they gifted it during their life.
Although these proposed changes are significant, it is important to understand that we are only at the beginning of what is sure to be a lengthy negotiating process in Congress, with no guarantees. Final outcomes will undoubtedly be affected by the results of negotiations on various other ongoing economic and political matters that are a part of the administration’s policy agenda. Where things ultimately land, no-one can say for certain, at this time.
Planning for Tax Law Changes
Although these tax law changes are currently only proposed, here are some actions that high net worth taxpayers may want to think about to protect themselves against enactment of these new rules.
- Consider converting traditional IRAs to Roth IRAs before the end of 2021, while the highest income tax brackets may be lower.
- Endeavor to keep future annual AGI under $1 million to avoid paying higher rates on long-term capital gains and qualified dividends.
- If selling assets for non-tax reasons makes sense, it may be wise to do so in 2021 to take advantage of lower long-term capital gain rates.
- If future transfers at death will result in significant income recognition, then making gifts in 2021 may be appropriate.
- Individuals may also want to consider moving higher-basis assets into their taxable estates to lessen the impact of gain recognition on transfers at death.
The tax planning professionals at Brock CPA stay up to date with ever-changing tax laws and are here to assist you with whatever tax panning needs or issues you may be facing. We encourage you contact us anytime for consultation at 904-330-0268 or by emailing firstname.lastname@example.org.