It is an uncertain time to prepare for any possible changes to the tax code. Tax planning for any proposed changes is challenging due to the uncertainty around which tax provisions will pass. However, the more knowledgeable taxpayers are about the possibilities, the more high-income taxpayers can achieve their tax planning goals and adjust their tax strategy accordingly. Below is a summary of important tax proposals, which are focused on high-income taxpayers:
i) An increase in the top individual income tax rate back up to 39.6 percent from 37%, High income tax payers earn income more than $1 million, the tax rate on long-term capital gains and dividends may increase to 39.6 percent from 20 percent (eliminating the tax break for carried interest).
ii) A proposal to end the tax deferral for section 1031 like-kind exchanges for gains in excess of $500,000, which allows real estate investors to defer income tax when they meet the requirements for the exchange of similar property.
iii) Eliminating stepped-up tax basis for estates with a $1 million exemption, keeping the existing exemption for the sale of personal residences. This would end the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and capital gains are taxed if the property is not donated to charity.
iv) A permanent extension to the current limitation in place that restricts the immediate use of large, excess business losses, which primarily benefits those making over $1 million. Currently, trade or business losses that are limited to $250,000/$500,000 can be utilized against other income such as wages and portfolio income. This provision is scheduled to expire after 2025.
There is certainty related to the Biden administration tax proposals being passed by Congress. There is uncertainty as to when the proposed tax law changes can be implemented (either retroactively or prospectively).We will be closely monitoring any progress in anticipation that something will occur in a timeframe that should make them a top priority for taxpayers to address.
Tax planning is challenging until more is known, but high-income taxpayers may want to consider how the anticipated tax proposals might impact any transactions. Please contact Akram and discuss with us to adjust your tax strategy accordingly.