Displaying items by tag: taxes

(Washington)

Most advisor attention as it regards Biden’s tax plan has been about increased capital gains taxes and the unwinding of the “step-up basis” in the inheritance of assets. However, there is another major risk and complication on the horizon. That has to do with state level inheritance laws and how they interact with Biden’s plan. The federal government has no formal inheritance tax, but rather an estate tax. States, by contrast, often have inheritance taxes. The big difference between the two is that the estate tax is levied on the estate itself, whereas inheritance taxes are levied on the beneficiaries. That means that each individual is subject to a different level of taxes based on their income.


FINSUM: To be clear, the implications of this are quite large for HNW individuals, as they could face much higher federal estate taxes in addition to high state level inheritance taxes.

Published in Wealth Management

(Washington)

All advisors are already nervous about Biden’s planned tax hikes on wealthy clients. As a quick refresher, the Biden administration wants to raise long-term capital gains taxes to 39.6% (in addition to applicable local and state taxes), as well as eliminate the “step-up in basis” at death in inheritance. This has major implications on its own, but advisors and CPAs have brought up another significant issue with the tax hikes completely aside from the increased level of taxation: it is extremely hard to document the original basis for many assets. This is particularly true for illiquid assets like real estate and small businesses—which often constitute the largest portion of an estate. According to Ed Zollars, a CPA, “How do you estimate the basis, especially when the person who had the best chance to answer that is deceased?”. KPMG summarized the difficulty of the situation further, saying “For a flow-through entity that’s been around for 45 years, in theory, I’d have to go through 45 years of tax returns … Many times, records aren’t handily available, and obtaining transcripts from the IRS is hard, too”.


FINSUM: On top of everything mentioned, remember that basis changes all the time in both LLCs and real estate, either by capital put in the company or through 1031 exchanges. This will be a reporting nightmare!

Published in Wealth Management

(Washington)

Any advisor has likely read about Biden’s new tax proposals on the “wealthy”…see the full story on our partner Magnifi’s site

Published in Wealth Management
Thursday, 24 June 2021 08:52

Biden's Tax Plans Spell Doom for Clients

(Washington)

Biden is going after the mother of all tax hikes, though it is deftly spread across a number of different areas so it takes significant effort to add it all up. That is partly by design, but partly by necessity, since the wealthy tend to face taxes across a number of different parts of their financial lives—income, capital gains, corporate taxes, inheritance. The reality though is that if you combine all of Biden’s proposals, wealthy individuals living in states with high income taxes (like New York) could face tax bills of over 80% when accounting for all the areas above. This would include a new top personal income tax rate, new higher corporate tax rates, the elimination of “step-up basis” in inheritance taxes (and potentially a higher inheritance tax rate), and state taxes of over 14% in New York.


FINSUM: This only precedents for this level of taxation in US history were during World War I and World War II, when tax rates got into the 90% percent range. Even then, though, there were easy loopholes and deductions to allow individuals to avoid that top rate.

Published in Wealth Management
Thursday, 17 June 2021 17:42

Biden’s Newest Tax Shock for Your Clients

(Washington)

Any advisor has likely read about Biden’s new tax proposals on the “wealthy”. We use quotes on that term because many of them would also apply to middle class families. One such policy which would hurt most heirs is Biden’s plan for taxing family businesses. As most know, Biden is planning to tax inherited assets on their original basis (not the basis at death). This will cause a big spike in taxes for many, especially in the case of inheriting businesses, as the basis of most businesses is zero dollars, since many are founded by parents and left to children. Consider an example of a business which Ernst & Young presented in a report. “…someone started a wine distribution company two decades ago. The business initially had no market value. When that founder dies in 2025, his daughter inherits the company, now worth $550,000 with annual revenues of $40,000.


Under current law, the company’s value for tax purposes would be “stepped up” to that new amount, and the daughter wouldn’t owe capital gains taxes on her inheritance. Next, say she sells the distributor five years later for $710,000, when its annual income has grown to $50,000 and she’s ready to cash out. Under current law, she would owe the 23.8% capital gains tax on its appreciation under her wing, or more than $38,000 ($710,000-$550,000 = $160,000; $160,000 x .238 = $38,080).


Under Biden’s proposal, she wouldn’t owe tax upon inheriting and running the business her father started — but neither would it get a stepped-up basis. Which means that when she eventually sells the company for $710,000, she would owe capital gains tax, at Biden’s higher rate, on its total gains since it started from zero. That’s a tax bill of more than $281,000 ($710,000 x .396 = $281,160). Under the White House’s plan, her tax bill is more than seven times higher. She can pay it over 15 years, at more than $18,700 a year, but may not have the cash from its sales.”


FINSUM: This is obviously a massive hike and a terrible burden for all but the wealthiest individuals. It is likely to cause debt for many, and a resulting fire sale in small businesses.

Published in Wealth Management
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