The wealthy are preparing for tax increases, working with their accountants to give away money or change their income to avoid the impact of higher rates.
With growing deficits at the state and federal levels, as government spending skyrockets and revenue falls from the Covid-19 crisis, taxes are likely to rise in the coming years, especially for the top earners. Presumptive Democratic candidate Joe Biden told wealthy donors at a fundraiser on Monday that he planned to follow through on his campaign plan to raise taxes on the wealthy.
“I’m going to get rid of most of Trump’s $ 2 trillion tax cut,” Biden said, “and many of you may not like that, but I’m going to close loopholes like capital gains and increase the base. “
Accountants and tax attorneys say they are seeing an increase in calls and emails from wealthy clients asking about actions they can take now to avoid tax increases in 2021 and beyond.
“It’s coming up in almost every conversation,” said David Handler, a partner in the trust and property practice at Kirkland & Ellis. “People are not only thinking about it, but they are acting accordingly. They know that in one way or another, tax rates may be going up.”
The main action the wealthy are taking now is to give money to family and friends. Under the current estate and gift tax, individuals can donate up to $ 11.58 million, and couples can give away up to $ 23.16 million, during their lifetime without paying the 40% gift tax. Democrats in Congress have been lobbying for years to reduce the gift and estate tax exemption to increase income.
Therefore, accountants advise the wealthy to donate up to the maximum of $ 11.58 million this year in case the exemption decreases or the tax rate increases.
“For many customers, this is a motivating factor for the gifts they planned to make all the time,” said Handler.
Regardless of who wins the White House, accountants say the wealthy fear some form of tax increase at the state or federal level. At the core of Biden’s tax plan is an increase in the capital gains tax and the elimination of the base of increase, allowing any appreciation in the value of the property that occurred during the owner’s lifetime subject to tax.
Accountants say they are also advising the wealthy to sell assets now that they have appreciated for a long period of time, and that they intended to sell soon anyway. That way, they’ll pay a maximum tax rate of 20% instead of risking the proposed 39.6% rate under Biden’s plan. Of course, given the decline in some asset values and the stock market so far this year, many of the wealthy may not want to sell yet.
Still, accountants and attorneys are advising clients who have seen huge gains in their stocks or properties over the years to sell now if possible.
“It has to make economic sense first,” said Joseph Perry, Marcum’s head of fiscal and business services. “A lot of people will wait until the end of the year, especially with stocks given the volatility in the market. But if you expect to make a profit until next year, you risk rates going up.”
The wealthy are also making plans to shift income by 2020, to protect it from potentially higher tax rates in 2021 and beyond. Private business owners, for example, are negotiating contracts with clients who carry more of the profits in 2020. Business owners are also moving expenses to the next year when possible.
Taxpayers who are members of corporations or have indirect income also earn as much income as possible this year if they can change it starting in 2021.
The coronavirus pandemic and impending tax increases have also made high-income people think more seriously about moving from high-tax states. Even if the state and local tax deduction limit, which was part of Trump’s tax cuts, is repealed, accountants say the wealthy who have been working from home in other states now realize how easy it is to would be leaving. While the process of changing a tax residence is lengthy, and could take more than a year, accountants say many of their clients are beginning the formal process of changing their permanent residence.
“This was the turning point for a lot of people, especially in finance,” said Perry. “That connectivity that kept them in New York may no longer be there. So now they realize they don’t have to be there and pay those taxes.”