How the rich prepare for tax increases


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

Financial advisers and their high net worth clients plan accordingly. Specifically, they see steps that can now be taken to avoid some of these higher taxes later.

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

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

Still, many fear a higher tax bill.

“Our customers are worried,” said Michael Nathanson, CEO and President of The Colony Group, which is headquartered in Boston and works with the rich. “It will be one of the biggest tax increases in history.”

Here are some of the actions that these worries lead to.

Prepare for higher taxes

Nathanson recommends that some customers try to ramp up their income this year before the higher rates go into effect.

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

Normally it tries to maximize future deductions to avoid the new 3% tax on customers with incomes over $ 5 million, but in this case they are taxed on the basis of adjusted total income rather than taxable. It doesn’t work because it’s done. Income.

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

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

“Donors 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. more.

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

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

Faced with higher capital gains

Wealthy people have a limit on how much they can prepare for potentially large capital gains in the future.

Indeed, policymakers have suggested hiking retroactively to September 13 of this year.

Still, experts say investors have choices.

It is one of the biggest tax increases in history.

michael nathanson

CEO and President of Colony Group

Fitzpatrick said individuals could change their capital losses until next year. This would offset the 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 of my capital gains could be subject to a 25% appreciation rate,” Fitzpatrick said. “So my loss, which can be compensated by my interest, is worth more than next year.”

Before inheritance tax trapped more people

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

As a result, advisers 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 make a bulk donation, that is to say, entrust the management of the property to the beneficiary. Another option is to use irrevocable trust.

According to Fitzpatrick, some trusts also relinquish their authority over assets – that is, estate taxes – but they can still control how the funds are distributed. For example, you may need to prevent your child from earning income until you are 25.

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

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