• Steve Coker, CFP

The Coming Tax Wave


There are rumors coming out of Washington – rumors of increased taxes. While the specifics are still being worked out, momentum is growing for a significant tax increase, especially for those in higher income tax brackets. And while you may not think of yourself as a high earner, many taxpayers may be impacted when selling investments, properties, or at death. Here is a quick summary of the more significant proposals being discussed.


1. Increased tax rate for those earning $400,000 and above.

One of the more well-known proposals is an increase of the highest marginal tax bracket from 37% to 39.6% and lowering the start of that bracket from $628,300 to $400,000. The remaining brackets are proposed to be left largely unchanged.


2. Increase the Long-Term Capital Gains Rate to 39.6% for gains over $1 Million.

This proposal would increase the highest Long-term capital gains rate from 20% to 39.6% for those earning over $1 Million.


3. Change to a “Canadian System” of recognizing capital gains at death.

Tax rules in Canada require the recognition and taxation of capital gains at death. Current US law provides for a step-up in basis for the heirs, eliminating the capital gain. If this proposal becomes law, it will significantly change the way that individuals plan for their estates.


4. Additional payroll taxes on high earners

This proposal would expand the Social Security Tax for those earning over $400,000. Currently, Social Security tax is 12.4% of wages, but only up to $137,700. Under the new proposal Social Security tax would stop and $137,700 and then restart again at $400,00 at 12.4%.


5. Change the Estate Tax

The estate tax will almost assuredly change. The situation is very fluid, but the estate tax exemption amount is expected to significantly decrease from its current $11.7 million, subjecting many more estates to federal estate taxes. At the same time rates are expected to increase.


Remember that the above proposals must go through tough negotiations in the House and Senate before they become law. It is still too early to make changes to estate plans or portfolio positioning based on the rumors. Nevertheless, it is important to be aware that change is coming, and likely in a matter of months. In fact, there is still a chance that congress makes law changes that impact 2021. Therefore, it is important to be alert and ready to make the appropriate changes in the coming months. We will continue to watch the situation and update you regularly.

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