In May 2021, the Biden administration released its revenue-raising proposals in the Treasury Department’s “Green Book.” It contains sweeping changes to the US tax system and can affect not only the ultra-rich but many other individuals. As a result, it’s time to make changes to prepare for and counter these proposed changes.
Considering the above, let’s look at some strategies you can consider to facilitate significant savings on both income and estate tax.
Tax Saving Strategies in Light of Potential Income Tax Changes
The first set of strategies relates to saving on tax in anticipation of potential income tax changes. These include:
- Accelerate taxable income. By paying taxes on taxable income now, you’ll inevitably pay taxes at a lower rate than the higher proposed rates. It, therefore, makes sense to accelerate taxable income, and some examples include Roth conversions, capital gain harvesting, shareholder dividends, exercising stock options, and more.
- Defer or spread out taxable income. By deferring taxable income over time, you could remain under new thresholds for higher tax rates. Here, examples include Roth conversions over multiple years, charitable remainder trusts, investing in Opportunity Zones, and more.
- Shift taxable income. To remain under the thresholds for higher tax rates, it may be a good idea to shift taxable income to other family members through, for example, charitable remainder trusts and limited family partnerships.
- Avoiding taxable income. By, for example, investing in Opportunity Zones, using incomplete Gift Non-Grantor Trusts to save state income taxes, or charitable lead trusts, you could avoid taxable income. This, in turn, reduces or avoids exposure to higher tax rates.
- Time deductions carefully. You’ll be able to receive the maximum tax benefit from a deduction despite income tax rates increasing or limits being imposed if you’re able to time your deductions carefully.
Tax Saving Strategies in Light of Potential Estate Tax Changes
These strategies relate to saving on estate taxes in anticipation of the potential changes and include:
- Make large gifts. To take advantage of the current transfer tax exemption before it’s reduced, it’s advisable to make large gifts, including gifting to irrevocable grantor trusts, dynasty trusts, or pre-funding life insurance trusts.
- Preserve accessibility. When making gifts, it’s important to ensure that the funds or property is still accessible if the donor needs or wants access to the funds or property and laws and circumstances change.
- Preserve flexibility. It may be necessary to reverse course to respond to a retroactive tax law change in some circumstances. It’s, therefore, vital that you preserve flexibility through, for example, qualified disclaimers in trust instruments or making formula gifts.
- Preserve insurability. It’s vital to acquire life insurance now to provide liquidity for increased estate taxes due to higher tax rates, lower exemptions, or increased income taxes resulting from the repeal of the step-up in basis at death.
- Use other estate planning techniques. Some estate planning techniques may become limited or unavailable, so it makes sense to take advantage of them now.
Despite sweeping changes to income and estate taxes, there are still some strategies you can use to save on your taxes. Hopefully, this post helped illustrate some of these strategies in more detail.
To learn about these strategies and others in more detail, contact us for more information.