Running The "What-If" Scenarios
In Step 1 of our Guide to Evaluating Your Tax Exposure, we invited you to know your situation inside and out—what your estate would look like with a 40% or even a 45% estate tax rate.
Now, in Step 2, we highlight the importance of “running the ‘what-if’ scenarios” and using flexible strategies within your estate plan. This technique will help you maintain and retain adequate control over your assets and income, regardless of tax changes that ensue.
A Note from Ed Wollman
"The following information is meant to give you insight into proposed tax law changes. These are currently not law at the moment.
As we discussed in our last Generations special reports, the changes could legally be made retroactive to January 1, 2021. It is more likely that the tax law change will be effective when signed into law or on January 1, 2022. Our crystal ball is murky; however, for those of you with anticipated taxable estates, know that the time to make a plan is now, and the time to gift is now."
Proposal #1 A reduction in exemptions
Presently, the tax exemptions are set at $11,700,000 per person (an increase from 2020’s exemption of $11,580,000).
The current proposal is set to reduce the exemption to $3,500,000.
Bear in mind; this exemption is already set to be cut in half in December of 2025.
Proposal #2 Limitation on Lifetime Gifting
There is a risk that lifetime gifting will now be limited to $1,000,000.
Proposal #3 An Increase in Federal Income Tax Rates
The proposal is to reverse the lower rates placed into law by the Tax Cuts and Jobs Act and raise taxes on individuals earning more than $400,000 in income. The 39.6% top marginal tax rate will be brought back (up from 37%).
Proposal #4 Increased tax rates on Capital Gains and Dividends
For taxpayers earning more than $1,000,000 per year, the capital gains tax and dividends will be taxed at ordinary income tax rates instead of the current favorable low rates.
Proposal #5 A reintroduction of itemized deductions
With a reversal of the Tax Cuts and Jobs Act, the doubled standard deduction would be removed, and the itemized deductions would return. However, high-income taxpayers will be limited to a 28% deduction under this proposal instead of the standard rate, which may be 39.6%.
Proposal #6 Elimination of the Step-Up in Basis
One possible major negative change that would affect all taxpayers is the removal of the step-up in income tax basis upon death. Presently, when you inherit most assets, you are provided a new basis for income tax purposes based on the decedent’s date of death fair market value of the assets. The removal of this huge benefit will result in the recipient receiving the same low basis that the decedent had during life.
Proposal #7 Elimination of the 1031 Like-Kind Exchange
This one is not clear at this early time. The loss of the like-kind exchange (postponing the gain on the sale/exchange of real property) would be a less than ideal situation for investors and business owners who wish to trade their real estate for a new piece of property.
Note: The corporate income tax under this proposal is expected to be increased as well.
Have more questions on how this may impact your estate plan?
Schedule an appointment with your team at WGA to go over your personal variables and potential changes. We will go over your personal limitations on lifetime giving, the federal income tax rate changes, and using itemized vs. standard deductions.
Stay tuned for an up-to-date report on which of the above-proposed tax law changes come into effect.