Earlier this year, President Biden outlined a budget proposing significant new government spending on infrastructure and expanding social programs. The administration outlined ways to partially fund this new spending through a combination of corporate, income, and estate tax changes. Together, these measures would significantly affect high-earners, high-savers, and those earning income through capital investments.

AMG has been watching closely as these broad budgetary goals were debated in Congress and actual legislation began to take shape. With the House Ways and Means Committee’s recent release of Subtitle I—Responsibly Funding Our Priorities, we now have more concrete guidance of what is likely to make it through the sausage-making of bill writing, from aspiration into law.

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Although nothing has yet passed, we believe the mounting evidence of potential significant tax changes calls for proactive steps to be taken sooner rather than later to take advantage of certain opportunities in the current tax regime, where possible.

Outline of Key Tax Proposals

Note: This is not an all-inclusive list of items. It covers those elements that are likely to directly affect most AMG clients.

Income and Capital Gain Tax Rates

Item Current
Law
Biden
Proposal
Ways & Means
Proposal
Top individual taxpayer marginal tax rate 37% starting at…

  • $518,400 (single individual, head of household)
  • $622,050 (married joint)
  • $311,025 (married separate)
39.6% starting at…

  • $452,700 (single individual
  • $481,000 (head of household)
  • $509,300 (married joint)
  • $254,650 (married separate)

Effective 1/1/22

39.6% starting at…

  • $400,000 (single individual
  • $425,000 (head of household)
  • $450,000 (married joint)
  • $225,000 (married separate)

Effective 1/1/22

High-income tax surcharge None None 3% of modified AGI (i.e. AGI less allowed investment interest) in excess of $5,000,000, or $2,500,000 for married filing separately.
Top marginal tax rate on realized long-term capital gain 20% (excluding 3.8% ACA* tax) starting at…

  • $441,451 (single individual
  • $469,051 (head of household)
  • $406,601 (married joint)
  • $248,301 (married separate)
  • 20% (excluding 3.8% ACA* tax) for those with less than $1 million
  • 37%, generally, reflecting ordinary income tax rates for those with greater than $1 million or $500,000 for married filing separately.
  • 25% (excluding 3.8% ACA* tax and 3% high-income tax surcharge) starting at same levels as current law.
  • Effective for sales after date of introduction (presumably 9/12/21)
  • Sales completed before 1/1/22 made under a binding contract entered into prior to date of introduction remain eligible for 20% rate.
Carried interest in partnerships Realized gain treated as long-term capital gain if 3-year holding period requirement is met. Realized gain treated as ordinary income. Realized gain treated as long-term capital gain if 5-year holding period requirement is met.
Wash sale rules N/A N/A Rules extended to cover commodities, currencies, and digital assets anti-abuse provisions. Effective beginning 1/1/22.

Gift and Estate Tax

Item Current
Law
Biden
Proposal
Ways & Means
Proposal
Unified credit against gift and estate taxes Exclusion equivalent to…

  • $11,700,000
  • $5,850,000 starting 1/1/26
Same as current law Exclusion equivalent to…

  • $5,800,000, approx. ($5,000,000 inflation-adjusted from 2010)

Presume effective beginning 1/1/22.

Tax on appreciated assets at death or upon gift None Assets deemed to be sold on death or gift; capital gain taxation applied. None
Basis treatment of appreciated assets at death or upon gift Bases of assets in estate are marked to market; an asset received as a gift assumes the donor’s tax basis. Presume that assets sold take the bases of the deemed sales price. Same as current law
Assets in a defective grantor trust at time of death Assets in a defective trust are excluded from the grantor’s taxable estate. Same as current law Assets are pulled back into a decedent’s taxable estate when the descendent is a deemed owner of the trust. Currently existing trusts are grandfathered with respect to assets previously transferred to the trust.
Assets sold by a deemed owner to a defective grantor trust at time of death Assets are generally treated as if no sale occurs. Same as current law Assets are treated as if a sale has occurred between the deemed owner and a third party. Applies only to future sales.
Valuation discounts for transfers of nonbusiness interests Allowed Allowed Not allowed after date of enactment.

Qualified Retirement Accounts

Item Current
Law
Biden
Proposal
Ways & Means
Proposal
Large IRAs: Contributions
(Traditional and Roth)
Allowed Allowed Not allowed, effective 12/31/21, for a taxpayer who owns IRAs and defined contribution accounts that total more than $10,000,000 and who has taxable income over $400,000 (single & married separate), $450,000 (married, joint), $425,000 (head of household).
Large IRAs: Special distribution requirements
(Traditional and Roth)
None None Effective 12/31/21, a special minimum distribution of 100% of all funds in excess of $20,000,000 and 50% of all funds in excess of $10,000,000, for taxpayers with incomes above those noted directly above.
Prohibited IRA holdings In general, an IRA cannot hold assets in which the IRA owner has a 50% or greater interest. Same as current law Effective 12/31/21, ownership threshold lowered to 10% for an investment not traded on an exchange. IRA owner may not be an officer of an IRA-owned entity.
*Affordable Care Act, March 2010

Possible Action Steps

  • Accelerate income and capital gains to current year. Use the lower tax brackets in 2021. Consider strategies to accelerate income including, but not exclusively, executing Roth IRA conversions, exercising vested stock options, and selling long-term growth investments like real estate. In all cases, make sure you look at all the planning considerations related to the action, not just taxes.
  • Accelerate gifts to family. This is a historically attractive window of opportunity for managing estate and inheritance taxes. The lifetime gift tax and estate tax exemptions are likely to decrease. Given the magnitude of the proposed changes, speed over legislative certainty may be in your best interest. It takes weeks or even months to implement a thoughtful estate plan. One vehicle to consider is the popular Spousal Lifetime Access Trust (SLAT).
  • Accelerate planned gifts to charity. By using a donor-advised fund like the AMG Charitable Gift Foundation, you can potentially make large charitable gifts out of your taxable estate today and grow those assets for years before disbursing your gift—and any gains—to charity.
  • Donate appreciated assets to charity. Donate highly appreciated securities to charity rather than realizing capital gains tax and using cash proceeds for gifting. You get the tax deduction for the market value based on the average of the high and low price on the date of the gift.
  • Proactively manage capital gains and losses. Selling securities using tax-loss harvesting is a way to offset current gains and help offset taxes in the future.
  • Focus on tax savings. Shift income into tax-deferred accounts (e.g., Traditional IRAs/401(k)s/403(b)s) and tax-exempt accounts (e.g., Roth IRAs/401(k)s/403(b)s), Health Savings Accounts (HSAs), and 529 college savings accounts. Roth 401(k)s may be particularly attractive if you have access to one. See: Deciding Between a Traditional or a Roth 401(k)?
  • Increase tax efficiencies. Allocate the right investments (e.g., stocks, bonds) to the right accounts (taxable, tax-deferred, tax exempt) to increase the after-tax growth potential of your investments.
  • Increase tax-free investment income. Consider tax-exempt municipal securities instead of corporate bonds in after-tax accounts to help reduce your taxable ordinary income.

Plan to Your Unique Circumstances

At AMG, we plan comprehensively, counseling each client on their unique circumstances, needs, and desires. Because of the clarity gained through our proprietary Financial Security Analysis and integrated five-year tax projection and cash flow analysis, clients can make prompt decisions when confronted with probabilities, not certainties.

Contact an AMG advisor to discuss appropriate changes to your long-term financial plan, given these evolving circumstances.

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