What We Will Be Monitoring In the Coming Months

With the passage of the American Rescue Plan Act of 2021 (ARPA), and optimism surrounding the future of our pandemic recovery, the Biden administration is now shifting its focus to reforming the tax code. Our team is closely watching the proposals, as they may have significant implications for tax and estate planning. Below are some of the details of the proposals that are most commonly referenced in the news and we believe would be most relevant to our clients and their families.

Tax Increases Targeted at Taxpayers With Income Greater Than $400,000

  • Re-instating the top tax rate to 39.6% from the current 37%.
  • Increasing the tax rate on long-term capital gains and qualified dividends to 39.6%, from the current 20%, on income exceeding $1,000,000.
  • Phasing out the 20% Qualified Business
  • Income Deduction.
  • Re-instating the overall limitation on itemized deductions.
  • Introducing a 12.4% Social Security tax on wages or self-employment exceeding $400,000.

Tax Cuts and Credits

  • Removing the $10,000 cap on the state and local tax (SALT) deduction.
  • Permanently increasing the child tax credit to $3,600 (for children under age 6) and $3,000 (for children ages 6–18) for certain taxpayers. The credit would also be fully refundable and available to be paid monthly, in advance, to eligible taxpayers.
  • Permanently enhancing the dependent care credit by increasing the maximum credit percentage to 50%, increasing the amount of eligible expenses to $8,000 (one individual) and $16,000 (two individuals), from $3,000 and $6,000 respectively, and making the credit fully refundable.
  • Permanently increasing the maximum eligible exclusion for electable dependent care benefits through an employer to $10,500, from the current $5,000.
  • Permanently enhancing the premium tax credits available for those who purchase health insurance through the marketplace exchange.

Retirement Plan Changes

  • Increasing the age to start required minimum distributions to age 75, from the current age 72, and exempting those with balances of $100,000 or less.
  • Allowing Qualified Charitable Distributions to be made from 401(k), 403(b), and 457 plans instead of only IRA accounts.
  • Increasing catch-up contributions for those age 60 or older to $10,000.
  • Allowing employers to make a matching contribution to younger taxpayers who are paying student loans.

Estate and Gift Tax Changes

  • Lowering the lifetime gifting exclusion to as low as $1 million from the current $11.7 million.
  • Lowering the estate exemption to as low as $3.5 million from the current $11.7 million.
  • Increasing the estate and gift tax rate to 45% from the current 40%.
  • Limiting the step up in basis at death and/or taxing unrealized gains at death.

The scope and planning implications of these possible changes are far-reaching. We will be watching and monitoring the status of these proposals very closely and stand ready to offer specific guidance in light of any enacted changes. Please reach out if you would like to discuss how any of these possible changes could impact your specific tax or financial situation, and what actions may be required or recommended as a result.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.