The transition to the Biden administration shines a spotlight on potential regulatory and tax policy changes that could go into effect as early as this year. Of course, nothing has happened yet, and it’s possible nothing could happen at all. Nevertheless, it’s important to be prepared for these five potential changes so you can act quickly if needed—and help your clients to do the same.
1. Removal of preferential rates for qualified dividends and long-term capital gains for taxpayers with income over $1 million
Under Biden, we could see qualified dividends and long-term capital gains taxed as ordinary income. Given the Senate deadlock, it’s hard to say whether Congress will actually implement this change. Even so, consider accelerating any planned sales for diversification (i.e., to remedy concentrated positions), capital raises, or other reasons to take advantage of current rates. That said, don’t let the tax tail wag the dog.
2. Increased top ordinary income tax rates from 37% to 39.6% at the $400,000+ income level
To the extent that your client will receive income in 2021 and has control over the timing, the earlier they receive it, the better. Consider accelerating wages for S corporation owners, guaranteed payments for LLC/partnership owners, and wages for C corporation owners to avoid having these be subject to a potential tax rate hike. This is not the year to wait until the last minute.
3. New limitation on tax deductions for charitable contributions
Similar to the two situations mentioned above: If you or your clients are planning a charitable gift in 2021 or 2022, consider making it as early as possible. Also, consider accelerating 2022 planned giving into 2021.
4. Expansion of Social Security wage base to more than $400,000 of earned income
This presents a significant incentive for converting from an LLC to an S corporation. Doing so can help to avoid self-employment tax on flow-through earnings, thereby mitigating the impact of this change. Business owners have only until March 15 to make an entity change election for 2021 without triggering late election rules. The time to act is now.
5. Decreased unified tax credit for gift and estate taxes and the elimination of the step-up basis at death
These potential changes could greatly limit the amount individuals can gift to other parties tax-free. For high-net-worth individuals, it’s important to establish a contingency plan for quickly executing a gifting plan if needed. Keep in mind documents related to gifts and trusts take time to execute. Having the documents and plan ready to execute should be a high priority for all high-net-worth individuals.
The bottom line: Be prepared—and make sure your clients are, too.
Although you don’t need to act now, you do need to have a plan—one that can be executed quickly if needed. Elevate CPA Group can help. We provide tax support to RIA firms and can help you provide value to your clients in planning for tax law changes, too. If you’re concerned about how these potential changes could impact you or your clients, contact us today.