With Tax Law Changes Likely, Here’s What You Might Consider
With Congress currently considering significant changes to tax laws, we should all prepare for our financial situations and estate plans to potentially shift. Nothing is decided for certain yet, but economists and political analysts predict some form of the following changes will likely be approved this year:
- Elimination of preferential tax treatment to long-term capital gains
- A new wealth tax on high-earning households
- Changes related to estate planning, which could increase future taxes on your heirs
- Changes to taxes related to carried interest
The increase in capital gains tax to 39.6 percent is likely to affect only about one percent of Americans because it only applies when your annual income exceeds $1 million. Having said that, if avoiding this tax is on your wish list, you have several options to consider. You might sell those assets now, taking advantage of the lower tax rate. Or, you can hold onto those assets long term, and hope for reduced taxes in the future. There might even be gifting strategies that could allow you to transfer some assets to family members.
As for higher income taxes, you might wish to focus on strategies to defer income. Consider a Roth conversion for retirement accounts, paying taxes at the lower rate now and enjoy non-taxable income in the future. Tax-advantaged investments such as cash value life insurance provide another option.
If you’re concerned about the possibility of higher estate taxes that will someday affect your heirs, you fortunately have plenty of potential avenues to explore. Gifting assets now, staying within the gift tax exclusion limits, is one way to begin passing wealth to the next generation. Establishing certain types of trusts are another way to protect your heirs. And of course, making gifts to charity each year can help you leave a legacy while also earning you a valuable deduction on your income taxes.
Strategies related to taxation and estate planning can quickly become complex. We do recommend that you meet with a tax professional and estate planning attorney to address these concerns proactively. Let’s also discuss these issues at your next appointment, so that we can help you adjust your overall financial plan if necessary.