Readying Your Retirement Plan for Pending Tax Changes

Following the passage of President Biden’s COVID-19 relief bill, the administration began to focus on what tax changes to implement to help pay for this support measure. These tax changes are anticipated to be wide-ranging and significant. This article reviews just some of the most substantial of these likely changes and how they will impact estate plans.


The Potential Timing of These Changes


Both House and Senate committees are working on both budget and tax proposals that will become part of a second budget reconciliation measure. Congressional committees are currently at work on proposals that will be included in the second budget reconciliation bill. The House and the Senate will create and approve a budget resolution to function as a means for the reconciliation process. 


Only 51 votes are required to pass budget reconciliation in the Senate. Effective dates of the newly enacted provisions are anticipated to be January 1, 2022, but some provisions have proposed effective dates as early as the date of enactment. Substantial advantages can be realized by people who anticipate expected changes and take action now to make the most of existing tax regulations.


Expected Capital Gains and Dividend Tax Rate Increases


Capital gains and dividend tax rates will likely increase for some higher-income taxpayers from the current level of 23.8 percent to as much as 43.4 percent. Higher rates will likely apply to taxpayers with adjusted gross income above $1 million, but this change could apply as low as to individuals whose income is $400,000 or greater. This change would tax higher-income taxpayers on long-term capital gains as well as qualified dividends at the same rate as ordinary dividends and short-term capital gains.


Anticipated Changes to Individual Income Tax Rates


For people earning more than $400,000, the top income tax rate is anticipated to return from 37 percent to its earlier rate of 39.6 percent. Section 199A’s pass-through deduction permits some pass-through business owners to deduct up to 20 percent of their qualified business income. Additionally, the $10,000 cap on state tax deductions might be replaced with limitations on itemized deductions.


Anticipate Estate and Gift Tax Changes


Currently, the estate tax and lifetime gift tax exemption are $11.7 million per individual. Additionally, a $15,000 tax exclusion per recipient also exists. The current estate tax rate on amounts greater than the exemption amounts is 40 percent. The tax basis in inherited assets is “stepped up” to the fair market value at the time of the death of the deceased individual. The Biden Administration will likely pursue an increase in the estate tax rate to 45 percent, but some have argued in favor of an even higher tax rate and a lower exemption amount.


Speak with a Knowledgeable Retirement Attorney


As the Biden administration continues working on tax proposals, additional details about the nature of these plans will become known. Those individuals who adequately prepare for these changes will be positioned to most successfully navigate those changes that occur. Contact Ettinger Law Firm today to schedule a free case evaluation.

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