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Week of May 3, 2021 - Tax Changes - Here We Go Again

May 06, 2021

Tax Changes - Here We Go Again

Just as we are starting to digest the 2017 Tax Cuts and Jobs Act, we bring in a new administration determined to upset the apple cart.  Granted, COVID and the CARES act changed everything - you cannot borrow over $4 trillion and not expect the bank to come calling at some point.  Well, your friendly Federal Bank is on the other line.  Below, we run over the likely changes that will most affect individual taxpayers.


Repealing the Step-Up in Cost Basis at Death - This does not seem to have enough support to pass in the near future. However, if the country continues to move towards support for more progressive policies, the step-up in cost basis is firmly in the crosshairs.


Corporate Tax Rates - Raising corporate tax rates from 21%.  While it is not likely there is support to raise back to the pre-Tax Cuts and Jobs Act level of 35%, it is likely the rate will be increased to around 25%.  It costs a lot to mothball a cruise industry (and effectively an airline industry) and someone needs to pay the piper.


Raising the Top Individual Tax RateBack to 39.6%- Highly likely.  It is a small change from the current top rate of 37%, so fairly easy to keep the Democrats in congress in line on this one.  If you make over $400,000, expect your rate to go up.  The difficulty I have with this is:  $400k in NYC is a lot different than $400k in Des Moines.  However, 99% of the world will not have much sympathy with that argument.


Itemized Deductions/Repeal the SALT Limitation - There has been much howling and gnashing of teeth in high tax (ie blue) states.  Limiting the state and local taxes (“SALT”) deduction to $10,000 has perhaps been the tipping point (on top of lockdowns and general lawlessness) to encouraged high-income earners to move the heck out of Dodge.  This move certainly will not increase the Treasury’s balance sheet, but might garner some extra votes come mid-terms.


Long-Term Capital Gains - The proposal is for capital gains to be taxed at the taxpayer’s income tax rate if they have income of $1,000,000.  We believe a change in capital gains rates is likely, but not at the income tax rate.  Look for the top capital gains rate to be in the 30% range.


Estate Tax Exemption - As financial advisors and planners, this and capital gains changes are the most difficult to manage for our clients.  In the past 20 years the exemption has gone from $675,000, to unlimited if you passed in 2010 (George Steinbrenner’s family says hello), to $11,700,000.  The current proposal is to lower the exemption to $3,5000,000.  The exemption may go lower, but the $3.5 million number is unlikely. 


As stated above, tax changes make it extremely difficult to plan for the future.  Some changes are easier to digest than others are.  Marginal changes in corporate and individual tax rates are logical:  things happen that are unexpected.  This forces congress to make changes to pay for unforeseen events.  Changes in capital gains and estate tax exemptions need to be seen as generational, not administrative changes.  This allows people to plan on how and when to liquidate holdings, make efficient estate planning decisions, and give to charities.  As far as markets are concerned, a slowing post-COVID/CARES act economy coupled with rising taxes will reduce expendable income making a recession all the more likely (no matter what Warren Buffett says).  Hopefully congress will act with a light hand until we actually understand the economic ramifications of shutting the world down for over a year (congress acting at all would be a nice change of pace).  Interesting times are ahead, plan carefully.