During the last few weeks, different ideas have been expressed and actual proposals have started to take shape.

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As the 2020 tax season winds down, we turn our thoughts to potential tax changes affecting 2021. The Biden administration ran on a platform of raising income taxes and reducing the estate tax planning options currently available to families. During the last few weeks, different ideas have been expressed and actual proposals have started to take shape.


IN 2021

APRIL 2021

This effectively



tax rate on these

investment earnings

resulting in a


RATE OF 50%.



President Biden recently announced that he proposes raising the top marginal tax rate from 37% to 39.6%.

This reverses the tax cut enacted under President Trump.

In addition, he proposes taxing long term capital gains and qualified dividends at ordinary tax rates for taxpayers earning over $1 million. This effectively DOUBLES the tax rate on these investment earnings.

Currently, long term capital gains and qualified dividends are taxed at a maximum federal income tax rate of 20%. In addition, capital gains and qualified dividends are subject to the federal NIIT – Net Investment Income Tax – rate of 3.8% plus the applicable state income tax rate. This proposed change could effectively tax capital gains and qualifying dividends at a combined tax rate of 50%.



The Biden plan would also limit the value of itemized tax deductions to a maximum federal tax rate of 28%.

Currently, itemized tax deductions reduce the income subject to income tax, thus effectively having a value of the highest tax rate a tax filer is subject to. For example, if a tax filer is in the 35% tax bracket, the itemized deductions have a value of 35%.

The Biden administration would also like to raise the tax rate for corporations. President Trump reduced the top rate from 35% to a flat rate of 21%.

The Biden plan proposes raising the tax rate for corporations to 28%.

The U.S. had one of the highest top corporate tax rates in the world at 35%.

President Trump’s tax cut was intended to make U.S. corporate tax rates more competitive and brought the U.S. rate to one of the lowest among developed nations.

The Biden proposal would put the U.S. in the middle of the pack with other developed nations.




Senator Bernie Sanders has introduced the “For the 99.5 Percent Act” which proposes to decrease the estate and gift tax exemptions which would subject a greater amount of a deceased person’s estate to the transfer tax. The Act

proposes to drop the estate tax exemption to $3.5 million per individual, $7 million for a married couple.

Current law allows the first $11.7 million of an individual’s estate to transfer tax free. This amount doubles for a married couple to $23.4 million. Only the amount transferred in excess of the exemption amount is subject to the transfer tax.



Another major proposal would affect the ability to transfer assets, in trust, to more than one generation. The Act proposes to restrict transfers to fifty (50) years before submitting the assets to an additional estate transfer tax.

Under current law, one can transfer assets to a trust, apply the GST – Generation Skipping Transfer – exemption and the assets can avoid being included in the estate tax computation for multiple generations.

There are additional items being proposed that could curtail other common transfer planning strategies. Both IDGTs – Intentionally Defective Grantor Trusts - and GRATs - Grantor Retained Annuity Trusts – have become targets for change.

• Currently IDGTs allow an individual to transfer assets to a trust that removes the asset from their estate for estate tax purposes, but allows the individual to retain the tax consequences of the asset for a period of time. • GRATs are an ideal way for an individual to transfer assets to a trust, retain the right to be repaid with an

interest component while passing any growth in excess of this amount to the trust beneficiaries after the predetermined period of time.


Sander’s Act also lowers the lifetime gift exemption to $1 million per individual. It would also limit the annual exemption to $10,000 and further limit the annual exemption to two such gifts per year (maximum of $20,000).

Under existing law, an individual’s $11.7 million lifetime exemption covers both gift and estate transfers. This allows individuals to utilize their lifetime exemption through gifting while alive rather than having to wait until transfers at death. In addition, an individual can make an unlimited number of annual gifts to other individuals of $15,000 each that do not count against their lifetime exemption.

In addition to lowering the exemption amount, the Act would increase the tax rate on taxable transfers. The Act proposes to raise transfer tax rates as follows:

45% transfers between $3.5 million to $10 million 50% transfers between $10 million and $50 million 55% transfers between $50 million and $1 billion 65% transfers over $1 billion

Currently the transfer tax rate is a flat 40% on transfers over the lifetime exclusion of $11.7 million per individual.



One major tax change that was enacted into law in 2019 impacts the timing of the taxability of retirement plan assets in the hands of a beneficiary.

For the majority of non-spouse

beneficiaries (and some other beneficiaries) the beneficiary of an inherited IRA or employer 401k plan must take their funds out of the plan over a period no longer than ten years. This change ended the ability to stretch inherited retirement plan assets over the beneficiaries’ lifetime.

Under prior law, a beneficiary could inherit their parents IRA or 401k plan and stretch the withdrawals over their estimated life expectancy. This allowed the beneficiary to include the amount into income over many years thereby reducing the overall tax impact.


Another proposal would eliminate valuation discounts for computing the fair market value (FMV) for the transfer of certain passive assets.

Currently, valuation methodology allows a minority interest and/or a lack of marketability discount to be calculated to determine the fair market value for the transfer of certain assets. These discounts calculate the reduction in the value of an asset that you cannot easily liquidate.

And one of the most impactful changes being discussed is the elimination of the step-up in basis on assets transferred at death. This is proposed under the STEP Act – Sensible Taxation and Equity Promotion Act – also introduced in the Senate. This would subject assets to taxation on the unrealized appreciation, as if sold, upon the transfer of assets by gift or inheritance.

Under current law, upon death, an asset is transferred at its fair market value. Thus, the beneficiary only recognizes gain when they sell the asset on the increase in value during the period they actually held the asset. In addition, the unrealized appreciation at death escapes capital gain tax to the deceased.

At JVL, we understand the importance taxes have on an investment portfolio. We focus on the after-tax returns of client portfolios and how they relate to an overall investment strategy.

We also help clients develop their customized estate planning strategies that minimize transfer taxes and maximize after tax transfers for their heirs. We have actively used the strategies being targeted and will continue to watch as the proposals work themselves through Congress.

We believe in being proactive as the changes move through Congress, and will be reaching out to our clients affected by these changes.

If you know of someone who can benefit from our services, please let us know and we’d be happy to assist. Jerry VanderLugt CPA, CFP, CVA

MORE THAN FINANCIAL ADVISORS Beneficiary Eligible Designated Beneficiary (Stretch Still Applies) Designated Beneficiary (10-Year Rule) Non-Designated Beneficiary (5-Year Rule) [5]



[1] Information obtained from https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates [2] Information obtained from https://taxfoundation.org/publications/corporate-tax-rates-around-the-world

[3] Information obtained from https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630 [4] Information obtained from https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[5] Information obtained from https://www.kitces.com/blog/secure-act-stretch-ira-401k-elimination-eligible-designated- beneficiary-retirement-accounts-taxes/

1535 44th St SW, Suite 400 Wyoming, MI 49509

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