July 2021
Information on Tax and Estate Planning from the Masonic Charities of the Grand Lodge of Pennsylvania
Tax Changes Are Coming (Maybe)! Over the years, I have resisted commenting on prospective tax legislation since it is just speculation like buying Dogecoin. However, so many people have contacted me on this topic in the past several months, I feel compelled to at least give an overview on what the landscape could be for estate and capital gains taxes in the upcoming 18 months based upon the recently published Treasury Green Book. So, here we go: 1. Capital Gains Tax Increases Right now, most individuals pay 15% on realized capital gains and 20% if you earn over $445,850 per year ($501,600 for a couple filing jointly). The proposed Biden tax change would increase the tax rate to 39.6%, but only for those earning over $1 million per year. This represents only 2.7% of those filing tax returns, but 62% of all taxes paid on capital gains. If you are lucky enough to be in the 2.7% group, please call me for a free charitable planning interview. For everyone else, just relax.
2. Tax on Unrealized Gains for Gifts and at Death This is the proposed change that received the most attention. Many donors I work with are what we call “capital gains poor.” They have a lot of appreciated stock like Apple which they have held in their brokerage account for years, and they don’t want to sell it because they would get hit with a huge capital gains tax. But if they hold it until they die, it goes to the estate or heirs at the date of death cost value, thereby wiping out all the capital gains before death (called the step-up in basis). This is a nice gift to the heirs, but not for Uncle Sam who loses the tax money. The proposed tax change would require any unrealized gains to trigger capital gains tax when given away to a recipient other than charity at the owner’s death. There would be a $1 million per-person exemption, plus existing exclusions for residences. There are a lot of frugal people who may be impacted by this tax and a lot of unhappy heirs as a result, BUT a lot of happy lawyers and accountants which advise their wealthy clients. According to The Wall Street Journal, however, only 3% of all families have unrealized gains over the million-dollar threshold, so unless you are one of those unlucky 3%, it is not as bad as it seems. One bright spot for charities is that the proposed change says the unrealized gains are NOT taxed if they go to charity. In conclusion, we are a long way off from either of these proposals becoming law, and for most of us, it will not matter anyway. I wouldn’t have sleepless nights about these proposed changes or plan any radical moves at this time. I will keep you posted going forward.