Several administration proposals were published in the U . S . Treasury ’ s “ Green Book ” on May 27 of this year . One was that the U . S . corporate income tax rate would increase from the current 21 % to 28 %. With an average state corporate income tax in the 7 % to 9 % range , the combined corporate tax rate would rise to 35 % or higher , placing the U . S . near the top when it ’ s compared with other countries .
The individual income tax rate would increase under the proposals from a maximum of 37 % to 39.6 % for those making $ 400,000 .
The Old-Age , Survivors and Disability Insurance ( OASD ) component of Social Security taxes , which currently phases out at $ 142,800 of wage income in 2021 , would resume at $ 400,000 of wages ( and also count pass-through income ). The hospital insurance component of 2.9 % would rise to 3.8 % for incomes above $ 250,000 ). This makes the effective marginal federal tax rate on income 39.6 % + 12.4 % + 3.8 % = 55.8 % for income above $ 400,000 . Add a state income tax ( say the one in Massachusetts , which is 5 %) and the total tax would be 60 %.
The Biden administration also proposes turning death into a taxable event — meaning that the estates of taxpayers would recognize a deemed sale of all appreciated assets they hold when they die , with a corresponding deduction allowed for federal estate tax purposes .
Biden proposes limiting the tax benefit of itemized deductions to 28 % for those whose income is more than $ 400,000 , even if their marginal tax rate is ( far ) higher .
The administration would also tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 % for people making income above $ 1 million . When you apply the net investment income tax ( 3.8 %) and state capital gains tax rates ( which are 13.3 % in California ), the effective rate could be over 50 %.
Like-kind exchanges under Section 1031 of the Internal Revenue Code would be limited to $ 1 million of gain per year per taxpayer .
The deduction for unlimited state and local taxes ( SALT ), however , would be restored under the “ Green Book ” proposal . Meanwhile , carried interest , a common arrangement in hedge funds , would be treated as ordinary income rather than as a capital gain .
Estate And Gift Tax Proposals
The administration has decided not to push an expansion of the estate and gift tax regime , at least during its first round of tax hikes . Instead , the president is proposing what might be termed the “ Canadian ” alternative , which is to tax all appreciated assets held by a taxpayer on the date of his or her death as if they were sold for fair market value .
However , estate tax “ reform ” ( i . e ., hikes ) is far from dead . President Biden advanced four proposals during his 2020 presidential campaign .
The first was to eliminate the step-up in tax basis for somebody ’ s assets when they die . The next was to lower the lifetime credit equivalent amount ( for tax-exempt gift and estate transfers ) from its current $ 11.7 million per person to $ 3.5 million . ( The credit for couples would fall from $ 23.4 million to $ 7 million .) The third proposal was to reduce the lifetime gift tax exemption to $ 1 million and decouple it from the estate tax exemption .
Finally , Biden proposed increasing the estate tax rate from 40 % to 45 % on larger taxable estates ( as a result of reductions in the estate tax and gift tax exemptions ).
When Will The Iceberg Arrive ?
The immediate question — and the justification for this timely if conjecture-filled article — is , “ When will this legislation , if enacted , become effective ?”
First , here ’ s a scary observation : The Wall Street Journal published an article on May 27 , 2021 , revealing that the Biden administration intends to increase the federal capital gains tax to 43.4 % … and that this would be retroactive to April 28 , 2021 .
Can they do that ?! The short answer is , yes they can . In 1993 , the Clinton administration signed a dramatic increase on income taxes , from 31 % to 39.6 % for individual taxpayers , on August 3 , 1993 , that was also retroactive for the entire calendar year . The U . S . Supreme Court later upheld the idea and the tax meter started running for January 1 , 1993 .
Many proposed tax changes are effective on the date the proposal is reported out of the tax committee — meaning that by the time you hear about the change , it is too late to plan for it .
But if taxes are retroactive , you may not even have until the end of 2021 to get your estate and wealth plans in order .
Today is the first day of the rest of our fiscal lives , and it may make sense to do immediately things that would be helpful in all cases and that might not be permitted later . The planning opportunities discussed here are practical strategies that work today — and are likely to be respected even if the U . S . Congress later enacts some or all of the Biden tax agenda .
Summer Of 2021 — Tax Planning At The Beach
The grand strategies listed here can be grouped into categories . The first group of strategies take advantage of low interest rates . The second group deal with pre-empting the Biden tax package — getting it all done before the wrecking ball drops .
Low-Interest-Rate Planning Strategies 1 . Loans to Family Members The current long-term applicable federal interest rate ( AFR ) is 2.08 % compounded annually ( as of June 2021 ). The midterm rate ( for loans of three years to nine years ) is 1.02 % compounded annually . The short-term rate ( for loans up to three years ) is 0.13 %.
These low rates mean you can loan as much as you want , for as long as you want , to children at relatively miniscule interest rates . 2 . Grantor Retained Annuity Trusts ( GRAT ) The GRAT is interest-rate sensitive and works well in a low-interest-rate en-
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