Taxes on gifts and transfers at death
Generations of Americans have enjoyed a provision known as a “step-up in basis,” protecting appreciated assets that they inherit from capital gains taxes when they sell them at a later date. That century-old provision appears that it will remain in place. Instead, the Chairman’s Proposal looks to cut the estate and gift tax exemption from its current $11.7 million (2021) to approximately half commencing in 2022. This will likely cause some wealthier taxpayers to consider substantial gifting before the drop in the exemption.
Tax cuts for lower income families
“Amid the increases, there is also momentum for several tax cuts aimed at lower income earners,” Drossman says. For example, there is an effort under way that would permanently extend the 2021 expansions for the Child and Dependent Care Tax Credit (CDCTC) and the Earned Income Tax Credit (EITC). (For 2021, the EITC applies to incomes as high as $57,414, for a couple with three children.1) Efforts are also in place to expand the provisions of the Child Tax Credit (CTC) and make permanent recent decreases in contribution percentages and extended credit eligibility for 2021 and 2022 under the Premium Tax Credits for the Affordable Care Act. (Income eligibility for each of these programs varies, depending on a number of factors; visit IRS.gov for details.)
When the change could take effect: Most would become effective in 2022 and together would cost an estimated $822 billion over 10 years.
What could individual taxpayers consider doing now?
It’s important to avoid taking precipitous action in anticipation of new tax laws—especially with changes still in the proposal phase, Hyzy suggests. “While tax increases can cause short-term uncertainty, history shows they don’t stop people from investing,” he adds. “Because the proposed changes affect a relatively small section of the nation’s top earners, most individual Americans won’t be directly affected.”
In addition to the higher taxes on high-earning individuals, the Chairman’s Proposal seeks to raise the corporate income tax rate from 21% to 26.5%, while also lowering it for corporations with income of up to $400,000. While investors may have concerns about the impact higher taxes could have on corporate earnings and market performance, companies are experiencing strong growth, increased operating leverage and better than expected earnings, all of which should help them absorb a tax increase, Hyzy believes.
“For individuals likely to be subject to raised rates, now is a good time to review your portfolio and your overall financial picture with your advisor and tax specialist,” he suggests. “Strategies such as tax loss harvesting could help offset a capital gains tax liability,” says Drossman. “You may also want to consider holding investments likely to generate the biggest tax bills in tax-advantaged retirement accounts,” he adds, noting that retirement accounts such as 401(k)s and IRAs are generally not subject to capital gains taxes. Rather, for traditional 401(k)s and IRAs, withdrawals at retirement may be taxed at your ordinary income rate. But such changes should only be considered in the context of your overall goals, time horizon and risk tolerance.