Potential Tax Law Changes Under the New Administration

by | Apr 29, 2021 | BFM Insights

Potential Tax Law Changes Under the New Administration

| wealth management  by Kathy Sablone, JD, AEP®, Director of Wealth Planning

Many of our clients have been asking us how their income and estate taxes may be affected by the new administration. Unfortunately, it is too soon to predict which proposals, if any, will pass. The potential changes are summarized below so that you can evaluate whether any advance planning may benefit you.

American Families Plan

President Biden has proposed the following changes to the tax code:

  • Increase the top tax rate for ordinary income from 37% to 39.6%
  • For households with more than $1 million in income, top capital gains tax rate would increase from 20% to 39.6%.
  • Tax carried interest at ordinary income tax rates.
  • Eliminate deferral of income tax for real estate exchanges when gains exceed $500,000.
  • Impose a tax on unrealized capital gains at death that exceed $1 million, with an exception for family-owned businesses and farms.
  • Increase the IRS budget to expand enforcement and auditing efforts.

For the 99.5 Percent Act

This bill, which was proposed by Senator Bernie Sanders and Senator Sheldon Whitehouse, includes the following provisions:

  • Reduce the Federal estate tax exemption from $11.7 million to $3.5 million (indexed for inflation) and set the gift tax exemption at $1 million. These changes would be effective on January 1, 2022.
  • Increase estate tax rates from 40% to a range of 45% to 65%.
  • Reduce the annual gift tax exclusion from $15,000 per donee to $10,000 per donee. In addition, total annual gifts would be limited to $20,000.
  • No discounts for transfers to family for lack of marketability and minority interests.
  • Require Grantor Retained Annuity Trusts (GRATs) to have a minimum term of 10 years and a maximum term of the annuitant’s life expectancy plus 10 years. In addition, the remainder value (value of the gift) must be no less than the greater of 25% of the trust’s value or $500,000.
  • Intentionally Defective Grantor Trusts (IDGTs) would be included in a grantor’s estate and distributions from the trust would be treated as gifts. Currently, these trusts are treated as completed gifts for gift and estate tax purposes, but the grantor is the owner for income tax purposes.
  • Dynasty Trusts would be essentially eliminated by a requirement that a generation-skipping tax-exempt trust terminate after 50 years. Existing trusts would be required to terminate 50 years after the passage of this Act.

The Sensible Taxation and Equity Promotion (“STEP”) Act

Senator Chris Van Hollen and others introduced a bill that would impose a capital gains tax on a decedent’s estate.

  • The first $1 million of gains would be excluded.
  • An additional $500,000 exclusion would apply to a personal residence.
  • No capital gains tax would be imposed on retirement plans.
  • Taxpayers would be allowed to pay the tax over 15 years.

The Ultra-Millionaire Tax Act

Senator Elizabeth Warren and others have proposed a wealth tax.

  • Households and trusts between $50 million and $1 billion would pay a tax of 2% per year.
  • Households and trusts over $1 billion would pay a tax of 3% per year.

What Does This Mean for You?

The current proposals encompass a wide range of changes, and we are likely to see more proposals in the coming months. Although the exact outcome and timing are uncertain, we expect to see some new tax legislation in the near future. To be prepared, you should review your tax situation with your Boston Financial Management team and other advisors to determine whether you should take any action before potential new tax rules take effect.

If you have any questions, please contact a member of our Estate and Financial Planning Group:

Kathy Sablone – [email protected] or 617-956-9712

Alisa Kim O’Neil – [email protected] or 617-275-0313

Important: This alert does not contain any legal or tax advice. You should always consult with your attorney, accountant or other professional advisors before changing or implementing any tax, investment or estate planning strategy.

IRS Circular 230 Disclosure: Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.