Preparing for potential tax law changes

Updated October 6 | Market news

The possibility of changes in the country’s tax laws has been anticipated ever since the election of Joe Biden as President along with a Democratically-controlled Congress. Now there are proposals under discussion in Congress, though no new laws have yet been enacted.

Depending on your financial situation, these proposed changes to the tax code could have a significant impact on your own tax liability. While the final package is not yet known, it may be beneficial to spend a few minutes reviewing what is under consideration.

Will the changes impact you?

The proposals on the table cover a wide range of the tax laws, including income tax, FICA (Social Security) tax, and estate and gift taxation. These proposals may affect you if you:

  • Have adjusted gross income equal to or exceeding $400,000 (as an individual taxpayer) or $450,000 (for married couples filing a joint return);
  • Itemize deductions on your federal income tax return;
  • Have IRAs or workplace retirement plans;
  • Make annual gifts to one or more individuals;
  • Are a recipient of annual gifts;
  • Have an estate that is valued at 3.5 million or greater;
  • Are in a position to inherit assets in the future; or
  • Have current or planned grantor trusts.

Highlights from the latest proposals by the House Ways and Means Committee are detailed first. Following are proposed changes announced earlier in the year by President Joe Biden and individual members of the U.S. House and Senate.

Highlights of the House Ways and Means Committee proposal

Tax rates for individuals

Raising the top tax rate

Current law
The highest marginal income tax rate is 37%. In 2021, this rate applies to those with incomes above:

  • $523,600 for individual tax filers
  • $628,300 for married couples filing a joint return
  • $314,500 for married couples filing separately
  • $523,600 for those filing using head of household status

Proposed changes
New rules would set the top marginal income tax rate to 39.6%. Effective in 2022, it would apply to taxable incomes over:

  • $400,000 for individual tax filers
  • $450,000 for married couples filing a joint return
  • $225,000 for married couples filing separately
  • $425,000 for those filing using head of household status

IRAs

Current law
Income limitations apply to those who wish to make a Roth IRA contribution. No contributions are allowed for those with modified adjusted gross incomes (MAGI) exceeding:

  • $140,000 for individual tax filers and those filing as head of household
  • $208,000 for married couples filing a joint return

These individuals are still allowed to execute a Roth IRA conversion. They also can make a contribution to a traditional IRA and then convert it to a Roth IRA, what is referred to as a “back-door” Roth IRA.

Proposed changes
The ability to carry out a Roth IRA conversion from a traditional IRA or from an employer-sponsored retirement plan would be would be prohibited for those with taxable income exceeding:

  • $400,000 for single taxpayers
  • $450,000 for married taxpayers filing a joint return
  • $425,000 for those filing using head of household status

An additional consequence of this proposed change is that it would effectively eliminate “back-door” Roth IRAs, converting a current year traditional IRA contribution to a Roth IRA. This provision applies to distributions, transfers and contributions made in taxable years beginning after December 31, 2031.

This provision also prohibits all employee after-tax contributions in qualified plans, and it prohibits after-tax IRA contributions from being converted to Roth IRAs regardless of income level, for distributions, transfers and contributions made after December 31, 2021. In effect, this provision would eliminate the so-called “mega-Roth conversion” strategy.

Another rule impacting those who exceed the income thresholds listed above is that they would not be able to make IRA contributions when the aggregate value of an individual’s IRA and defined contribution plans exceeds $10 million at the end of the prior taxable year. In addition, required minimum distributions (RMDs) of 50% will apply to the value of these accounts in excess of $10 million up to $20 million. For balances in excess of $20 million at the end of a calendar year, an RMD of 100% will be required in the next calendar year.

Proposed legislation would also prohibit investment of IRA assets in entities in which the IRA owner has “substantial interest.” Under current law, substantial interest is defined as 50% or greater, or one-third of a business while the IRA owner is also acting as its CEO. Proposed legislation would adjust the 50% threshold to 10% for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The proposal also prevents an IRA owner from using IRA assets to invest in an entity in which the IRA owner is an officer.

Potential capital gains tax and other investment changes

Long-term capital gains and qualified dividends

Current law
Individuals pay a federal income tax rate ranging from 0 to 20% in taxes on realized capital gains when selling an asset that is held longer than 12 months. The same rates apply to qualified dividends received, typically those paid by U.S. companies or certain foreign companies. The highest rate of 20% currently applies to single tax filers with adjusted gross income (AGI) over $445,850 and married couples filing a joint return with AGI over $501,600. For single people with AGI over $200,000 or married couples with AGI exceeding $250,000, an additional 3.8% Net Investment Income Tax (NIIT) applies.

Proposed changes
The top capital gains tax rate would increase to 25%. For those also subject to the NIIT, it would result in a total tax of 28.8% on long-term capital gains or qualified dividends. Under the revised proposal, NIIT will apply to taxpayers with AGI over $400,000 (single tax filers) or $500,000 (married filing a joint return). Note that NIIT is not assessed on wages already subject to Social Security and Medicare (FICA) taxes. As written, the new top capital gains tax rate would become effective on transactions that occurred from September 13, 2021 forward. The effective date could change as the final bill is negotiated.

Also proposed is a new surtax of 3% for ultra-high income earners. It would apply to married couples filing a joint return with modified adjusted gross income (MAGI) exceeding $5 million and married couples filing separately with incomes above $2,500,000. This would apply for tax years after Dec. 31, 2021.

Tax changes that could affect estate transfers and gifting

Estate tax exemption and estate tax rate

Current law
The unified gift and estate tax exemption amount now stands at $11.7 million per person. For estates valued at a larger amount, the top estate tax rate is 40%.

Proposed changes
The current exemption amounts would sunset in 2022. After this year, the exemption would revert back to the base established in 2010, which accounting for inflation, will be in the range of $6 million per person.

Grantor trusts

Current law
Taxpayers can use grantor trusts to push assets out of their estate while controlling the trust closely.

Proposed changes
A provision adds Section 2901, which treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. This would apply effective on the date the tax legislation is enacted.

Potential changes to taxes for businesses and business owners

Current law
Owners with minority positions or those with a non-controlling interest in a Limited Liability Company (LLC) are allowed to value their interest at a lower price to account for the lack of control and marketability of the interest.

Proposed changes
These discounts would go away if assets of the LLC include publicly traded securities, non-operating cash or other passive, non-business assets. Notably, the new law includes a carve-out for family farms and businesses. These entities would remain entitled to utilize a special valuation reduction for qualified real property used in the farm or business. This allows decedents who own real property used in a farm or business to value the property for estate tax purposes based on its actual use rather than fair market value. The proposal increases the allowable reduction from $750,000 to $11,700,000.

The proposal also introduces a graduated corporate income tax structure. Instead of flat rate of 21% that applies today, the new structure is proposed to be 18% for first $400,000 of income, 21% on income up to $5 million and a rate of 26.5% on income above $5 million. This graduated tax rate is phased out for corporations making over $10 million while personal services corporations are not eligible for graduated rates.

Highlights of proposals from the Biden administration and other Congressional representatives

Potential personal income tax changes

Marginal income tax rates

Current law
(See above under “Highlights of House Ways and Means Committee proposals.”)

Proposed changes
The top marginal tax rate would be restored to 39.6% (the level it was reduced from in a 2017 tax package).1 Notably, applicable income thresholds are lower than the existing thresholds that currently apply to the highest tax rate. Under this proposal, 39.6% tax rate would apply to those with incomes above:2

  • $452,700 for individual tax filers
  • $509,300 for married couples filing a joint return
  • $254,650 for married couples filing separately
  • $481,000 for those filing using head of household status

Note that this schedule varies from what was proposed by the House Ways and Means Committee (outlined above). In addition to the higher top marginal income tax rate, a Net Investment Income Tax of 3.8% may also apply at certain higher income thresholds.

Itemized deductions

Current law
Those who itemize deductions can claim a maximum of $10,000 for state and local income or sales taxes and property taxes paid in a given year (often referred to as SALT deductions). There are few other restrictions on the ability to claim itemized deductions.

Proposed changes
The $10,000 limit on state and local taxes would be eliminated under current proposals, restoring the ability to fully claim those deductions.1

However, additional proposals could limit the ability to claim deductions for those in higher income tax brackets. Itemized deductions could be limited to the 28% tax bracket.

Another proposal would reinstate the so-called Pease Limitations itemized deductions for taxpayers earning more than $400,000.1 This limitation required some higher income taxpayers to reduce itemized deductions by a certain percentage. If it is reinstated, a number of taxpayers will see their ability to fully utilize itemized deductions limited and their tax liability increase as a result.

FICA (Social Security) taxes

Current law
Social Security (FICA) taxes have two components, Old Age, Survivors, and Disability Insurance (OASDI) tax at 6.2% and Hospital Insurance Tax at 1.45%. Both the employee and employer pay these amounts with self-employed individuals responsible for both the employee and employer portion. For 2021, OASDI tax is no longer deducted for any earned income over $142,800 for individuals.

Proposed changes
While President Biden has not included a proposal to alter the OASDI tax at this time, he has, in the past, endorsed a specific plan. It would apply an additional 12.4% OASDI tax for income levels above $400,000 (shared by the individual taxpayer and the employer). This is one of many proposals that have been laid out as alternatives by the Social Security Administration to improve the program’s long-term solvency.3

IRAs and workplace retirement plans

Current law
Required minimum distributions (RMDs) from employer-sponsored plans and traditional IRAs currently must begin by April 1 after the year in which an individual reaches age 72. In addition, those age 50 and older have flexibility to take advantage of higher contribution limits to IRAs and workplace retirement plans such as 401(k)s.

Proposed changes
The required starting date for IRA or retirement plan distributions would be delayed as follows:4

For those who turn age:

RMDs must begin after reaching age:

72 after 12/31/2021

73

73 after 12/31/2028 

74

74 after 12/31/2031

75

Later starting ages for required distributions allow money to continue to grow on a tax-advantaged basis in retirement accounts for an extended period of time.

An additional provision of the same proposal would expand the amount that individuals age 62 and older could contribute to their workplace retirement plan compared to current law. This would allow more income to be deferred from current taxation.

Potential capital gains tax and other investment changes

Long-term capital gains and qualified dividends

Current law
(See above under “Highlights of House Ways and Means Committee proposals.”)

Proposed changes
Proposals under consideration would raise the applicable tax for capital gains and qualified dividends to the proposed highest marginal income tax rate, 39.6% for those with AGI of $1 million or greater.1 When combined with the Net Investment Income tax, it would result in a total tax of 43.4% on long-term capital gains or qualified dividends for those with AGI of more than $1 million per year. Note that this schedule differs from what is proposed by the House Ways and Means Committee (outlined above).

The Net Investment Income Tax would also apply to all income exceeding $400,000 that is not otherwise subject to FICA or self-employment tax, even if it is not considered “investment income.”5 For example, the definition has been expanded to include gross income and gains from trade and business income not otherwise subject to employment taxes (see below under “Potential changes to taxes for businesses and business owners”).

Gains from the sale of assets held less than one year will still be considered short-term capital gains and subject to tax at ordinary income tax rates.

Carried interest tax

Current law
A provision of current tax law that primarily benefits private equity and hedge fund managers defines a category of income referred to as carried interest. This allows a good portion of income earned by these managers to be treated at the more favorable capital gains tax rate of 15 or 20%.

Proposed changes
This form of compensation would be treated as wage income subject to employment taxes and at a top tax rate of 39.6%. Capital gains tax treatment would still apply for investors with money at risk (i.e., private equity partners who invest their own money in their funds). Certain family partnerships would also be exempt from these tax law changes.1,6

Potential estate and gift tax rate changes

Estate tax exemption and estate tax rate

Current law
(See above under “Highlights of House Ways and Means Committee proposals.”)

Proposed changes
Notably, President Biden’s proposals would retain the current estate and gift tax rules, most of which are set to expire in 2026. Another proposal that’s been brought forward would establish a progressive taxation system for estates transferred at death, similar to the marginal tax brackets that apply to income.7 The proposed brackets (with no cost-of-living adjustment) are:

Value of estate at death

Applicable estate tax rate

$0 to $3.5 million

0%

>3.5 million to $10 million

45%

>$10 million to $50 million

50%

>$50 million to $1 billion

55%

>$1 billion

65%

This proposal would also reduce the lifetime gift exemption to $1 million per individual and $2 million for married couples, with no cost-of-living adjustment. Lifetime gifts will reduce the $3.5 million estate tax exemption.

Changes in step-up in cost basis for assets transferred at death

Current law
An asset that is inherited from a deceased individual benefits from a step-up in cost basis. For example, if an individual purchased a stock with a cost basis of $10,000 and it had risen in value to $100,000 by the time that person died, the beneficiary of that stock would have the cost basis established at $100,000. This would avoid tax on the $90,000 gain that occurred while the initial owner held the stock.

Proposed changes
The step-up in cost basis for inherited and gifted wealth would be eliminated. In the example above, this would mean that along with inheriting a stock valued at $100,000, the beneficiary would also inherit a tax liability on the $90,000 capital gain, significantly reducing the value of the inherited stock. This proposal includes certain transactions involving the sales and gifts to a grantor trust.8

Among the specific provisions being considered are:

  • Unrealized capital gains at death will be treated as “sold” assets upon transfer to a beneficiary. The difference between the deceased owner’s cost basis and the asset’s fair market value on the date of death, or the alternate valuation date, will be taxed as a capital gain. However, this would apply only to the extent the gains exceed the $1 million exclusion.
  • Tax on unrealized capital gains is due when capital assets (equities, real estate, equipment, etc.) are transferred by gift or sale to a “defective” trust if the property in the trust is not includable in the grantor’s estate for estate tax purposes.
  • Implementation of a “21-year rule” for all non-grantor trusts, whether newly created or pre-existing, that would impose payment of tax on unrealized capital gains every 21 years after establishment of the trust. A trust created in 2005 or earlier will have its first “deemed realization” in 2026. Income taxes owed from “deemed realization” on assets other than actively traded assets (i.e., illiquid assets) may be paid over a 15-year period.
  • Income taxes paid on unrealized capital gains for assets, other than actively traded assets, would be deductible for estate tax purposes and payments can be spread out over 15 years.
  • A $1 million exclusion would apply for property transferred at death, indexed for inflation in $10,000 increments (less any exclusion previously used for gifts).
  • Up to $100,000 of the $1 million exclusion can be used during a person’s lifetime, with any remaining amounts available upon death.
  • There would be an exemption for gifts or bequests with unrealized capital gains that are directed to a spouse, a trust with a spouse as sole beneficiary or a charity. Under the spousal exception, unrealized capital gains on assets transferred to a spouse (or a trust with spouse as sole income beneficiary) will be taxed as ordinary income at the spouse’s death.9

Taxation of large trusts and estates

Current law
Taxation of capital gains and qualifying dividends are at the current favorable rates that are no more than 20%.

Proposed change
Capital gains and qualifying dividends earned by trusts and estates would be taxed at the same rate as applicable ordinary income tax rates for individuals with taxable incomes exceeding $1 million.1

Additional potential changes affecting common estate planning techniques

Annual exclusion gifts

Current law
Individuals can gift up to $15,000 per year per recipient (to an unlimited number of recipients) and have those gifts excluded from gift tax. This allows a couple to gift up to $30,000 per recipient in a year (with an unlimited number of recipients) with no gift tax ramifications. In addition, an individual can receive an unlimited amount of gifts from any number of donors.

Proposed changes
A proposal has been made to reduce the maximum annual gift excluded from gift tax to $10,000 per recipient, with donors limited to total annual gifts of $20,000 that would be excluded from gift tax. In addition, no recipient could receive more than $10,000 per year.3

Grantor trusts

Current law
Establishing grantor trusts such as Spousal Lifetime Access Trusts, Intentionally Defective Grantor Trusts, Irrevocable Life Insurance Trusts, Beneficiary Deemed Owner Trusts and Beneficiary Defective Inheritors Trusts, allow individuals to shift assets from their estate while still having a say in how assets are directed.

Proposed changes
New rules, if approved, would treat the grantor of a trust as the “deemed owner” of trust assets.4 As a result of this change:

  • Assets would be included in the deceased grantor’s estate at death and subject to estate tax.
  • Distributions made to non-spouse beneficiaries during the grantor’s life would be treated as gifts and subject to both gift tax on the fair market value of the assets as well as capital gains tax on the difference between the fair market value and the grantor’s cost basis.2
  • During the grantor’s life, when the grantor ceases to be the “deemed owner” of the grantor trust, trust assets attributed to the grantor as “deemed owner” would be treated as a transfer by gift and be subject to gift tax.
  • Gains would also be recognized and subject to tax if the grantor is no longer considered the “deemed owner” of the trust. Capital gains would be taxed based on the difference between the fair market value of the appreciated asset and the grantor’s cost basis.2

These proposed rules would apply to any grantor trust, created or receiving a contribution, on or after the date the new law is enacted (if that occurs). Grantor trusts created and funded prior to the date of enactment would be grandfathered under current law.

Under proposed rules, a new Sec. 1062 would be created, and gains would be recognized and subject to tax if the grantor is no longer considered the “deemed owner” of the trust. Capital gain would be taxed based on the difference between the fair market value of the appreciated asset and the grantor’s cost basis.10

GRATs and similar arrangements

Current law
These trusts can currently be established with a duration of at least two years.

Proposed changes
Grantor Retained Annuity Trusts (GRATs) would require a minimum duration of 10 years. In addition, the GRAT would be required to have a minimum taxable “remainder interest,” (the greater of 25 % of trust value or $500,000) determined at the time of its creation.4

Generation-Skipping and “Dynasty” Trusts

Current law allows generation-skipping and dynasty trusts to continue over generations.

Proposed changes
The duration for each type of trust would be capped at 50 years. This new time limit on the life of such a trust would apply both to newly created trusts as well as those that existed prior to the new law being enacted. Upon expiration of the 50-year grace period, distributions from the trust to a “skip person” would be subject to the generation-skipping transfer tax.4

Valuation discounts

Current law
Valuation discounts are allowed in the transfer of:

  • “non-business assets” held in business entities (i.e., partnerships and LLCs); and
  • partial interests in entities that are majority-owned or controlled by members of the same family.

Proposed changes
Valuation discounts for such transfers would be disallowed. Certain family limited partnerships would be excluded from these changes.4

Treatment of unrealized appreciation for Trusts, Partnerships and Non-Corporate Entities

Current law
There currently is no recognition of unrealized gains in these entities, meaning no resulting tax liability.

Proposed changes
Gains on unrealized appreciation of property would be realized if that property was not subject to a recognition event within the prior 90 years starting January 1, 1940. The first potential date that a recognition event could occur would be December 31, 2030.2

Potential changes to taxes for businesses and business owners

Corporate income tax rate

Current law
The top tax rate on corporate income is 21%. This was reduced from a 35% rate in legislation enacted in 2017.

Proposed changes
The corporate income tax rate would be raised to 28%. Another proposal would end the current exemption on the first 10% return on foreign assets for companies that are subject to the Global Intangible Low Tax Income (“GILTI”). These proposals would also increase the minimum GILITI tax to 21%. Also under consideration is a 15% minimum income tax on financial statement profits for companies with more than $2 billion in net book income that might otherwise not be taxed.10

Capital gains and step-up in cost basis

Current law/Proposed changes
Refer to the information above under “Potential investment tax changes,” as the same rule changes related to long-term capital gains and step-up in cost basis would apply here.

Deduction for pass-through entities

Current law
Owners of sole proprietorships, partnerships, S-Corporations and LLCs can claim a 20% tax deduction for qualified business income.

Proposed changes
This deduction for pass-through entities would be eliminated in the next wave of tax legislation for those earning more than $400,000 via a phase-out formula.

Taxation of pass-through and business income

Current law
For owners of partnerships, LLCs and S Corporations, only AGI between $250,001 and $399,999 that is not subject to employment taxes is subject to Net Investment Income Tax (NIIT) or Self-Employed Contribution Tax (SECA).

Proposed changes
On top of current rules, for business owners with AGI exceeding $400,000 per year, gross income and gains from trade or business income not otherwise subject to employment taxes will be subject to the NIIT. Limited partners, LLC members and S corporation owners who provide services and materially participate in their respective entities would be subject to Self-Employed Contribution (SECA) tax on their distributive shares of income over the threshold amount. Current exemptions for certain types of S Corporation income (e.g., rents, dividends and capital gains) would still apply.2

Treatment of “like-kind” exchanges for real estate held in a trade or business

Current law
If a business owns appreciated real estate, sells the property while at the same time purchasing another “like-kind” property, the taxable gain realized on the sale of the property is deferred.

Proposed changes
Deferrals of gains continue to be allowed, but only up to $500,000 for a taxpayer or $1 million for a married couple filing a joint return. Any gains realized in excess of those thresholds are realized with tax due on the gain. This proposal would be effective starting in 2022.2

Limit on excess business loss limitations for non-corporate taxpayers

Current law
There is a limit on the extent to which pass-through business losses can be used to offset other income for the taxpayer. Such losses are limited to the sum of gains from business activities plus an additional threshold amount. In 2021, the threshold amount is $524,000 for married couples filing a joint return and $262,000 for all other taxpayers (threshold amounts are adjusted for inflation over time). This law was set to expire in 2027.

Proposed changes
The current law would stand but the excess business loss limitation would be made permanent, effective in 2027.2

Provisions that affect specific industries

Current law
The provisions listed below do not exist under current tax law.

Proposed changes
A range of proposals is being considered, including a financial risk fee on financial institutions with more than $50 billion in assets, eliminating the tax deduction for the costs of direct-to-consumer prescription drug advertising, imposing a tax on pharmaceutical companies if drug price increases exceed inflation, and an expansion of clean energy tax initiatives.11

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Increased enforcement of tax laws

Enforcement measures such as tax audits have declined in recent years. Funding is being proposed to boost enforcement activity by the IRS. It would primarily be focused on large corporations, businesses, and estates and higher income individuals. Also included in the package are requirements that financial institutions report information on account flows. This would require the reporting requirements on earnings from investments and business activity similar to rules that already apply to reporting on wages.1

How markets may react to federal income tax law changes

The White House proposal that would raise the corporate income tax rate to 28% has the greatest odds of affecting the investment markets. As noted above, Congress is more likely to consider a smaller increase in the corporate tax rate. If so, it may limit the potential fallout for markets. However, a greater impact may be felt on certain industries or individual companies.

The actual, or effective, tax rate paid by individual companies — and the average effective rate affecting certain industries and sectors — depends on details yet to emerge in Congressional negotiations. Some industries will see larger tax increases than others, making it likely that the legislation will impact sector and industry performance more than it does the broader market.

Another potential market impact could result from an increase in the capital gains tax on high earners and the potential elimination of step-up-basis rules. Yet Congress may soften the capital gains tax rate increase and step-up-basis rules compared to current proposals. The effective date of the capital gains tax increase is also a factor.

Of greatest concern is that the change would be made retroactively, giving investors no opportunity to act before the new law takes effect. If the effective date of any new law is some time after the law passes, either later in 2021 or January 1, 2022, investors may rush to realize gains, causing a wave of selling. It’s also possible that if it appears the laws are due for a change, a significant number of investors not directly affected by the law would try anticipating the change and begin selling off their positions prior to enactment. The risk of such a selloff depends largely on the magnitude of the capital gains increase proposed in Congress, and how much time is available for investors to react or plan ahead.

It should be noted that previous capital gains tax increases, (in 1987 and 2013), while smaller than the current proposals, did not appear to have any material impact on the markets.

Other factors besides tax policy will continue to impact the markets and investor sentiment. For example, along with the tax policy changes under consideration, there are spending measures that are supportive to certain sectors of the market. Just like tax policy changes will have a varying impact on companies, tax changes will have varying impacts on investors. Individual investor concerns may vastly outweigh concerns for the broader market.

The legislative process from here

Proposals have been on the table since April 2021, so already this process has taken some time. It is likely that the House of Representatives will vote on a new tax bill before sending it to the Senate for consideration. The tax proposals are tied to other spending bills that are also up for consideration. The scope of those spending bills and their approval may well dictate the final outcome of any new tax legislation.

While the debate is likely to continue for some time in Congress, the general consensus is that any new laws will pass before he end of 2021.

Tax-saving steps to consider today

Far-reaching potential tax changes could have a dramatic impact on some individuals and estates, so it’s important to understand what potential alterations to the tax code could apply to your own circumstances and how it might affect the way you position your assets.

Individual investors should carefully consider the potential for changes to long-term capital gains tax rates as they assess their own portfolios. Investment decisions should consider more than tax policy changes and tax consequences, but tax is an important factor in investment decision-making. If you hold appreciated assets that you’re already considering selling, you may wish to lock in those gains before any potential tax increase is applicable.

Those with large estates that could be subject to increased estate tax liability, potentially beginning in 2022, will want to explore planning options in the interim. Among the strategies to consider is the establishment of grantor trusts and gifting significant assets to take advantage of today’s higher exemption amounts. However, since the effective date of any new legislation is not yet clearly defined and these tend to be complex strategies, swift action is required.

Here are some additional steps you may wish to consider to help position yourself as favorably as you can in the event tax increases are enacted into law:

  • Accelerate income into 2021. This can include Roth IRA conversions and taking gains in Intentionally Defective Grantor Trusts.
  • Sell long-term capital gain assets and business interests in 2021. This allows you to take advantage of the current laws with more favorable tax rates.
  • Defer deductions. If tax rates rise in the future, delaying deductions until 2022 or beyond will help temper the impact of those increases.
  • Utilize life insurance policies. Proceeds are generally not subject to income tax. Capital gains taxes can also be avoided if the policy is properly structured. It may play a more important role for beneficiaries if new laws eliminate the step-up in cost basis at death for those who inherit appreciated assets.
  • Step up gifting. Make significant gifts in 2021 to take full advantage of the current expanded unified gift/estate tax exemption amount and reduce the size of your estate.
  • Realize capital gains on highly appreciated assets during your lifetime. If the step-up in cost basis is eliminated, taking gains while you are living and paying taxes on the gain will reduce your estate and the amount of estate taxes due while limiting the tax burden on beneficiaries.
  • Accelerate establishment of grantor trusts. Under current proposals, grantor trusts in effect prior to the enactment of legislation will be “grandfathered” in. Work with trusted advisors to determine if grantor trusts are appropriate for your circumstances and established before tax laws change.
  • Review your current financial and estate plans. Be sure to work with your team of trusted professionals including your financial, legal and tax advisors.

It’s important to remember that things could change between what is being proposed today and what may eventually be enacted into law. We will continue to monitor the evolving tax policy debate and inform you of important developments as they emerge.

Talk with your U.S. Bank wealth professional if you have questions about the potential impact on your own situation and financial plan. We stand ready to assist you and will keep you informed as likely outcomes stemming from the 2021 legislative agenda come into sharper focus.

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