How wealthy people are preparing for tax increases

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To pay the price of the historic and radical expansion of the social safety net, President Joe Biden and Democrats plan to slap wealthy Americans with higher taxes.

Financial advisors and their wealthy clients are planning accordingly. Specifically, they are seeing moves that can now be taken to avoid some of those steeper taxes later.

Some tax law changes that may begin soon include: A new 3% additional tax on those who earn more than $ 5 million. Increased marginal income tax rate from 37% to 39.6% for individuals with household incomes above $ 450,000 and individuals above $ 400,000. The capital gains ratio applied to assets such as stocks and real estate has been increased from 20% to 25%.

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Advisors say many clients are sighing at the latest suggestions. Biden wanted to raise the capital gains rate to 39.6%.

Still, many are afraid of higher tax bills.

“Our clients are concerned,” said Michael Nathanson, CEO and Chairman of The Colony Group, which is headquartered in Boston and works with the wealthy. “This will be one of the biggest tax increases in history.”

Here are some of the actions these worries are driving.

Preparing for higher taxes

Nathanson recommends that certain clients try to accelerate their revenue this year before the higher rates come into effect.

For example, if an individual sells a business, he may try to close the deal by the end of the year, Nathanson said. Those who get big workplace bonuses may try to negotiate how to receive money by 2022.

Normally, he tries to maximize future deductions to avoid the new 3% tax on clients with incomes above $ 5 million, but in this case they are taxed based on adjusted total income rather than taxable. This does not work because it is done. income.

“Adjusted total income is calculated before itemized deductions are considered, so common deductions such as charitable donations and mortgage interest do not affect the proposed new additional tax. Hmm, “he said.

To avoid clients hitting higher marginal income tax rates next year, Maron Fitzpatrick, managing director and principal of Robertson Stevens in San Francisco, has a depressed family of real estate-like income-generating assets. I advise you to consider giving it to. Lower bracket.

“Givers reduce taxable income and recipients pay lower tax rates on income from assets,” said Fitz Patrick, a certified financial planner who works with clients with net worth of $ 10 million or more.

Another way to report a decline in taxable income next year, according to Fitzpatrick, is to postpone some of the charitable donations and the resulting deductions until 2022.

“Charity income tax deductions are more valuable in an environment with higher income tax rates,” he added.

Ahead of larger capital gains

Wealthy individuals have a limit on the amount they can prepare for potential high capital gains in the future.

This is because policy makers have suggested hiking retroactively until September 13th of this year.

Still, experts say investors have choices.

This is one of the biggest tax increases in history.

Michael nathanson

Colony Group CEO and Chair

Fitzpatrick said individuals could change their capital losses until next year. This would offset profits if it could be 25% instead of the current long-term tax rate of 20%. (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 subject to a 25% capital gains rate,” Fitzpatrick said. “So my loss, which can be offset against my interests, is worth more than next year.”

Before the inheritance tax traps more people

Lawmakers are also proposing to reduce property and lifetime gift exclusions from the current $ 11.7 million to about $ 6 million. This means that more people will be subject to inheritance tax of up to 40%.

As a result, advisors say they are telling clients considering a lifetime wealth transfer to do so by the end of 2021.

According to Fitzpatrick, there are several ways to do this.

You can give a gift altogether, which means you entrust management of the property to the beneficiary. Another option is to use irrevocable trust.

According to Fitzpatrick, some trusts also waive their authority over assets, that is, inheritance tax liabilities, but they may still be able to control how funds are distributed. For example, you may need to prevent your child from earning income until you are 25 years old.

“This helps prevent the rapid depletion of trust,” Fitzpatrick said. “After the death of the original beneficiary, their children become beneficiaries. [It] Protect wealth for future generations. “

How wealthy people are preparing for tax increases

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