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President Joe Biden and Democrats are planning to slap wealthy Americans with higher taxes in order to pay for a historic and widespread expansion of the social safety net.
In response, financial advisers and their affluent clients are also conspiring. In particular, they are looking at steps that they can now avoid some stepper levies.
Some changes to the tax code that may soon be on the horizon include: a new %% surcharge on those earning more than িয়ন 5 million; mar to increase the maximum marginal income tax rate from %% to .6..6% for household income over ৫ 50,000 and for individuals earning more than $ 600,000; And increasing the rate of capital gains, which applies to assets such as stocks and real estate, from 20% to 25%.
Advisers say the recent proposal has left many customers breathing a sigh of relief. Biden called for a capital gain rate of 6.6%.
Still, many fear a higher tax bill.
“Our clients are concerned,” said Michael Nathanson, CEO and chairman of The Colony Group, a Boston-headquartered advisory firm that works with high-wealth individuals. “This will be one of the largest tax increases in history.”
There are some actions that are requesting those concerns.
Ready for higher taxes
Nathanson recommends some customers try to increase revenue this year before higher rates become effective.
If a person sells a business, for example, they may try to complete the transaction at the end of the year, Nathanson said. Those who receive large workplace bonuses may try to discuss ways to earn money before 2022.
Normally he will try to maximize future deductions to avoid new 3% tariffs for clients with incomes over $ 5 million, but this will not work because the tax is not taxable but will be based on adjustable total income.
“Consistent gross income is calculated before the itemized cut-in factor, so general deductions such as charitable contributions and mortgage interest will have no effect on the new Sartex as proposed,” he said.
To avoid hurting clients with higher marginal income tax rates next year, Malone Fitzpatrick, managing director and principal of Robertson Stephens in San Francisco, advises them to consider giving a family member the gift of income-generating assets such as real estate. A lower bracket
“Gifts reduce taxable income and provide lower tax rates on income from recipient assets,” says Fitzpatrick, a certified financial planner who works with clients worth 10 10 million or more.
Fitzpatrick said another way to report lower taxable income next year would be to donate to your charity – and delay the earnings they would earn you until 2022.
“In an environment with a high income tax rate, charitable income tax deductions are more valuable,” he added.
Advancing at a larger capital gain rate
Wealthy people are limited in how much they can prepare for what could be a higher capital gain rate in the future.
This is because policymakers have proposed extending it to September 13 this year.
Still, investors have options, experts say.
Individuals can differentiate their capital loss until next year, which will offset their profit loss when the tax rate could be 25% instead of the current 20% long-term rate, Fitzpatrick said. (If your profit is $ 10,000, but you lose $ 5,000, your net profit is only $ 5,000.)
“Next year, all my capital gains could be a 25% cap profit rate,” FitzPatrick said. “So my loss, which I can counterfeit against my profit, is even more valuable next year.”
Before the estate tax traps more people
Lawmakers are also proposing to reduce the estate and lifetime gift exclusion from the current .7 11.7 million to about 6 6 million, meaning more people will be affected by the estate tax up to 40%.
As a result, advisers say they are telling clients to consider a lifetime asset transfer before the end of 2021.
FitzPatrick said there are many ways this can be done.
You can give the gift directly, which means you hand over control of the assets to the receiver. Another option is to use an unchanging belief.
With some trusts, you also relinquish power over assets – and therefore estate tax liability – but you will still be able to establish some control over how funds are distributed, Fitzpatrick said. For example, you probably don’t want a child to be able to earn an income from it until they reach the age of 25.
“It helps protect the trust from rapid erosion,” Fitzpatrick said. “After the death of the main beneficiary, their children are the beneficiaries and so on. [It] Saves resources for future generations. “