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Tax Deadline – What to Know for Next Year and Biden’s Taxes

By Paul J. Carroll, CFP®June 14, 2021November 28th, 2023Videos

We’re coming up on June 15th – tax deadline after all the extensions for Texas; was May 15th if you’re not in the state of Texas. What do we we expect next year? There’s a lot of talk about Biden 2020, 2021. Where are we going to talk about? Obviously if you’re not ready for your taxes, June the 15th, you already are aware, I’m sure, that you can extend all the way to October 15th. So what’s coming up for 2021, 2022? First and foremost tax changes will be next year, not this year. So this is the year for making planning changes. Some of the plans that are in the Biden proposal: one is increase the top marginal tax rate to 39.6% from 37% for those married, filing jointly, over $509,000. Clearly for most Americans, this isn’t going to make any difference whatsoever.

And it’s really just a reversion back to the Obama years. Not unlikely that this will pass. Some more controversial provisions include capital gains. They want to tax capital gains at 37% if your total income is greater than $1,000,000. This one’s a little more problematic because when you start adding state taxes, Medicare tax – and by the way, they want to expand the 3.8% Medicare tax to all unearned income – you actually start getting scenarios where capital is getting taxed at a higher rate than labor. And that will normally result in economic inefficiencies. So, there’s going to be an enormous pushback on this one. I wouldn’t count on it happening until it happens. Much more likely, though this is just conjecture, is that for people making over a million dollars, that the capital gains rate would be 28%, 30%, some lower percentage, if at all.

Another controversial element of the capital gains tax is the proposal to impose capital gains on transfers at death and gifting. Now, this is going to be a difficult one, and even if it passes, it’s going to be difficult to stick. And there’s two elements to this. One, they’re talking about a step up in basis being replaced with no step-up in basis. And two: they’re talking about imposing capital gains when gifted or at death. Now, I don’t think there’s a snowball’s chance of a capital gain tax being kicked in at death. I don’t know about the step up in basis. That one is a little bit hard to justify for want of a better term, but deferring that capital gains until the asset is actually sold by your heirs makes a lot more sense. Why is that so problematic? Well, if your heirs inherit a business, trying to calculate the value that business on any given day, it’s extraordinarily difficult. Same with ranch property; land. I mean, listed stock is easy. You just look it up that day. But often the only way to tell what a business is worth is to actually sell it. Other countries that have tried this have really struggled with implementation. That’s not unlike dealing with a wealth tax, so I wouldn’t hold my breath on that one happening.

There is a major attempt though, to harmonize net investment income and self-employment income for taxing. You know there are ways to game this, that of course every good CPA knows. And what they’re trying to do is make it so that you can’t. So if you’re getting significant pass-through income, you at least would pay what you would pay with net investment income and some other types of income. They also want to eliminate carried interest. And the proposal is it would be eliminated for everyone over $400,000 in income. Carried interest is probably the most egregious loophole in the tax code. There’s not going to be a lot of people other than hedge fund managers who are going to miss this one at all.

There’s going to be a limit on the 1031 exchange benefit. This one’s another controversial one. The benefit may be completely removed, or they may limit to say $500,000 for a single or $1,000,000 for married filing jointly. What is a 1031 exchange? It’s basically, if you’ve invested in real estate of some form and you sell it, you can replace it within a given amount of time and defer that capital gain. There’s a strong push to either eliminate or reduce the benefit of that opportunity.

So this is a time for significant estate and tax planning. In fact, most of the top estate and tax planners that I know have already announced that they’re probably not going to take new clients after September, because they are going to be so busy. Which means if you want to plan, you’re going to want to get with your wealth manager, get with us, get with your tax advisor, your estate planner; hopefully get with them in a holistic fashion so you can be ready for what may happen, what probably will happen, and what will happen. Capital gains – that’s going to be a vigorous conversation, but if these provisions do pass, there’ll be an enormous incentive to gift and sell high capital gains items. And that will happen this year. And there’s enormous capital gains embedded after the run-up from COVID.

So SALT deductions are another troublesome area, actually, for the Democrats because the Democrats are trying to rationalize taxes in many, many ways. But getting rid of the sales and local tax limitation actually goes in the opposite direction. It benefits people in high tax states, and that’s just not high income tax, that’s high property tax. People in Houston, Austin especially, would love to see the SALT limit eliminated. But that costs tax revenue and goes in the other direction. So it’s very hard to tell how that will go. The lifetime exemption right now is $11.7 Million per person. If you’re a couple, you can see how that can double up to $23.4 Million nicely.

There will be powerful interests lobbying to maintain the status quo on a lot of these tax elements. What’s definitely going to happen is there will be changes; there will be increased taxes. There’s a bill to pay for getting out of the COVID mess. What’s far less certain is how significant those bills will be. What is absolutely certain is they’re not going to get everything. And even if they did, tax planning is a refined science. That’s still not going to get everything. We wish you the best of investment success. Thank you.



Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.