Planning for Potential Tax Changes

Let’s discuss the American Families proposed tax plan. While none of these proposed changes have been put into place yet, it is important to start planning for what could become law. Below are some items to keep an eye on and some planning opportunities to consider.

Changing Tax Brackets

The first potential tax change to consider is the increase to the top ordinary income tax rate. Currently the top tax rate is 37% for single filers with income of $523,600 or more, and married filers with income of $628,300 or more. The proposed change would make the top tax rate 39.6%. We currently do not know what the overall income tax brackets will look like. There has been extensive talk about making sure there is no tax increases for families with income under $400,000. We have yet to hear if that means that the top bracket will start at this lower income level or what other tiers may look like. As we find out more, we will keep you updated.

In anticipation of this change there are a few ideas to consider. If you are over 70 ½ and charitably inclined, you can consider making a QCD (Qualified Charitable Distribution) from your retirement account. This can be counted towards satisfying your RMD (Required Minimum Distribution) and excluded from income.

Additional ways to give to charity would be to donate appreciated stock, or establish a DAF (Donor Advised Fund) where you can transfer appreciated assets and then give to various charities of your choice in both the current year and future years. All of these planning items have the potential to decrease tax amounts.

If you are still working, it would be a good idea to think about funding your retirement plans. If you have a plan through your employer you can contribute up to the maximum allowed which will help decrease taxable income. If you are self-employed, you can establish various retirement plans with varying contribution limits.

Capital Gains Rates

Probably one of the most watched potential change to the tax law is the potential change to capital gains rates. Under the current proposal there would be an increase to long-term capital gains rates for those with income over $1 million. These rates would increase from 20% to the highest ordinary income tax rate of 39.6%. This rate could be further increased by the current additional Medicare tax of 3.8% which was established under the TCJA making the rate as high as 43.4%.

With this potential change it will become important to look at ways to keep your income below that $1 million threshold. Again, if you are eligible to contribute to a retirement plan, this is an easy way to decrease overall taxable income while saving your money for the future. Donating highly appreciated stock instead of cash is also a great way to cut down on potential taxable income. It is also being discussed how harvesting gains in lower income years and losses in higher income years will help to mitigate issues with the $1 million threshold.

Estate Tax Changes

While there are a number of potential changes that have been discussed in regards to estate taxes, the only portion that is in the current proposed plan is the elimination of the step-up in basis at death. This change carries a $1 million dollar per person exemption amount which would be portable between a couple. This allows a surviving spouse the ability to transfer the deceased spouse’s unused exemption amount to their assets to be used for their estate.

A common practice used in estate planning is to hold onto appreciated stock until death so that the heirs of the decedent would benefit from the step-up in basis. This proposed tax change will make us re-evaluate this strategy. It will become more common practice to strategically sell appreciated stock when necessary to attempt to stay below that $1 million income threshold during your lifetime while also decreasing the potential gains to be realized at death. Gifting to heirs now instead of waiting until death is also going to be a focus under these new estate changes.

We are working diligently to understand all of the ins and outs of these proposed changes so that we can assist you further with your tax and investment needs.

We will continue to update you on the changes surrounding the proposed American Families tax plan.