Mansour Gavin LPA presents this legal update on US Tax Law changes:

• With the transition of the Presidential Administration and control of the U.S. Senate, there is talk of changes to the tax code in the air. Nothing is certain yet, and numerous possibilities have been hinted at, but only recently have actual proposals begun to take shape. While this may be a long process, and more importantly, no “horse trading” has yet to begin, it is important to follow what is under discussion and what the impact may be. With a stated intention of not increasing taxes on individuals making up to $400,000 per year, there are implications for personal income taxes, of course, but also corporate income taxes, as well as estate, gift, and generation-skipping transfer taxes. While no tax laws have been changed, here are some of the major points we are keeping an eye on, in terms of tax brackets: Corporate taxes: Among the proposed changes, the most notable is returning the corporate tax to a progressive rate structure, and the top marginal bracket to 26.5%.
• Individual taxes:
• For individuals, the top income tax bracket would be raised to 39.6% for income in excess of $400,000 for individual taxpayers, $425,000 for head of household and $450,000 for married individuals.
• Conversions of traditional IRAs to Roth IRAs would also not be available for those over the top income tax bracket thresholds.
• The tax on capital gains would be increased from 20% to 25%. While there had been discussion that the “step up” in basis would be eliminated for inherited assets, that has not appeared in the actual proposals to this point.
• Estate taxes: Under the 2017 tax act, the estate tax exemption was effectively doubled and currently stands at $11,700,000. The 2017 tax act is set to “sunset”, or expire, in 2026 and, if not renewed, the exemption would be restored to its pre-2017-act amount of $5,000,000 and then be adjusted for inflation. The current proposal would accelerate the sunsetting of the exemption and would be reduced to approximately $6,200,000 per individual.

It is not only the tax brackets and exemptions that would change, the planning for taxes would also be impacted. Part of the budget proposal would increase staffing at the Internal Revenue Service, and the broadening and deepening of the audits undertaken. 

In recent years, many estate plans have made aggressive use of techniques yielding discounts for the value of property that changes hands from one generation (through trusts and other vehicles) to subsequent generations. Increased audits of such techniques will certainly lead to challenges to the valuation of the assets being transferred. In addition, new rules would drastically restrict, or perhaps eliminate, others.

The use of “grantor trusts” to move assets out of the estate of the grantor at no (or limited) income tax cost would likely be eliminated, as the exclusion from the grantor’s estate would no longer be available. Many individuals have contributed small businesses to their IRA accounts, with the expectation that there would be huge growth. Currently, one may contribute an asset where the contributor owns up to 50% of the business. That threshold would be lowered to 10%.

Additionally, contributing assets that are only available to accredited investors (those who meet minimum requirements for income and net worth) would be eliminated. While these changes are merely proposals, awareness of what changes may be coming and when changes may become effective needs to be on your radar. Rushing in to change because of fear of what might become law is not necessarily the best course.

Some planning ideas will continue to make sense, whether the tax laws are changed or not. And, accelerating the implementation of some plans may make sense whether or not the tax laws ultimately do change. Revisiting your estate and financial plans, and a re-examination of your goals, in a studied manner is always a good idea. We will keep an eye on what changes to the tax laws look to become more settled and will be ready to assist you in your review and fulfillment of your planning needs.