Prepare for Changes in Tax Laws and Possible Retroactivity

As we enter into a new era of tax code proposals from the Biden administration, it’s important to be thinking about what those changes may mean when planning for the upcoming tax season and retirement.

The proposed tax increase on capital gains may be applied to taxpayers with annualized realized gains over $1 million, with those high net families paying a higher tax rate of 39.6%, nearly double the current 20% rate for individuals, explains the article “Capital Gains Strategies to Keep Clients on Track for Retirement” from Wealth Management.com. Unlike previous tax proposals, there is now talk of making these changes retroactive to April 28, 2021.

Congress has historically never affected tax bills on a retroactive basis, but these are uncertain times and Congress is very divided. While fundamental tax and estate planning should continue as the final tax legislation is far from being decided, there are some steps to consider.

First is an accelerating gain realization to a period before the effective date of any legislation. If legislation is made retroactive but the start date is January 1, 2022, this won’t be needed, but could still be helpful.

The second planning strategy is charitable giving with appreciated securities. For families who are philanthropic, making donations with appreciated securities have several benefits. The taxpayer receives an income tax charitable deduction for the value of the security and the capital gain is not realized when the security is transferred to a charity. This strategy also benefits the family in a high tax situation.

Finally, investors may find it best to hold on to investments for extended periods to avoid realizing capital gains.

Retirement planning is being impacted by the discussions happening on Capital Hill as well. The negotiations and research on limiting a step-up in cost basis of an inherited asset after a person’s death is being watched carefully by estate planning attorneys and accountants. The step-up in cost basis often dramatically reduces the capital gains owed by the recipient. If this does happen, estate planning attorneys may need to become more aggressive with planning for gain realization.

If this change does come to pass, increasing fixed income investments in taxable accounts may become more valuable.

What can you do while waiting to see what action Congress takes? Reevaluate your risk profile and consider your retirement budget and cash flow needs. Equally important, check in with your estate planning attorney. While there’s no way to know exactly what the final form of these legislative changes will be, they will have an impact on your estate plan. Make sure you are as prepared as possible, so your estate plan changes can be made in a timely manner.

Reference: Wealth Management.com (Sep. 3, 2021) “Capital Gains Strategies to Keep Clients on Track for Retirement”

Suggested Key Terms: Capital Gains, Retirement Planning, Retroactive Legislation, Step-Up In Cost Basis, Estate Planning Attorney, Gain Realization, Charitable Giving, Taxes, Fixed Income Investments