By Josh Gottlieb
Some of you may recognize the title of this article as a passage from Ecclesiastes 3:1-8 but more likely recognize it from Pete Seeger’s song made famous by The Byrds: Turn! Turn! Turn! (To Everything There Is a Season) which dealt with - among other things - preparing and planning.
That season is now upon us.
We have just completed a roiling election with twists at every turn. The Democrats now control the Executive and Legislative branches. The control is thin, but it gives Democrats control of the essential tax writing committees in both Houses. Tax legislation is going to happen sooner rather than later. President Elect Biden has provided his roadmap of his vision for new tax legislation. The passage of the Covid stimulus bills has accelerated the need for revenue as our national debt will pass $30 trillion in 2021. We all know where the tax revenue is coming from: those who can more easily afford it.
What we can expect is a series of targeted efforts to increase meaningfully taxation on the wealthy. This includes a capital gains rate increase the Biden team promotes to be raised to as much as the ordinary income tax rate, contemplated to rise to 39.6% plus adding increasing the capital gains tax (that will include the 3.8% Medicare Surtax (a/k/a Obamacare) to 43.4% for more than $200,0000 and potentially higher for income in excess of one million dollars. Any of the promoted tax changes will be a sharp increase in taxes for wealthy Americans. Whether it also includes increased taxes through the loss of the step-up in basis at death, resulting in both a taxation on the growth of the asset at death as well as estate/transfer tax. This could possibly reduce the asset by as much as 75% when passing to future generations. The Biden Tax Plan (“BTP”) eliminates the carried interest rules and taxes private equity and hedge fund managers’ gains at an ordinary income tax that will exceed 40% federally. Estate and gift tax credits are targeted to be cut in half, reducing 2020’s nearly $11.6mm per person to $3.5 - $5.0 million. The real estate sector that has enjoyed both tax free exchanges under IRC section 1031 (and thereby deferring gains from appreciation of real estate) and step-up in basis at death, essentially allowing real estate appreciation with imposition of income tax faces the an oft-discussed BTP possibility of losing both (tax-free exchange and step up in basis at death) - a change that will alter the real estate industry as never before seen.
Such changes will require complete re-assessment and modification of planning that has been put in place.
The BTP impacts nearly everything for the wealthy – sale of private residences, ordinary income, capital gains taxation on the sale of an asset (such as appreciated stock) to the sale of a business will each require reassessment. Such events will need to be reviewed, reconsidered and for many completely overhauled. All is not lost since there is a desire to remove the cap on the State and Local Tax deduction although the Democrats will need to justify why this is not a benefit for the rich.
The Republicans will not roll over and have some procedural tools to negotiate various tax provisions. The loss of not one, but both senate seats in Georgia removes any comfort that a balanced legislative branch would impede or defer the massive tax overhaul that is core to the Biden agenda.
What was a consideration in December has become change that is inevitable in January.
It should be an interesting next couple of months. Certainly, with the political furor that has continued, there are many elements to the Biden agenda that will most assuredly commence with seeking political middle ground to begin to mend the country and finding some path to create calm in a Nation divided. Concurrently, reorganized efforts to timely distribute the Coronavirus vaccines that has been a debacle for the first month of disbursement. These early Biden agenda items will take time, but we are anticipating that the agenda will begin to take root and rise to import before 2022 is reached, perhaps as early as Q3 2021. Whether the tax legislation is passed this year is anyone’s guess.
Nevertheless, this is not the time to wait and see. We have been discussing these inevitable tax increases with clients and their advisors for the past 2 years. There are several opportunities to alleviate the sting of the anticipated tax increases and the loss of certain tax benefits.
The time to act is now.
If historical practices continue, bills impacting taxation in recent decades ultimately take effect from the date legislation is introduced or even as it starts getting proposed. Most often the date of introduction becomes effective date for an act. To avoid the problem of scurrying to make changes as legislation is active, you need to meet with your advisors now. We have been developing our own ‘Biden Tax Act Vaccines’ (“BTAV”) and counseling our clients with specific ways to adjust for the tax mischief developing in Washington. As the song (and bible) says there is a “time to plant, a time to reap…” The time to reap is now. Find BTAVs that protect and insulate your wealth.
Joshua A. Gottlieb is the Chairman and Chief Executive Officer of The Gottlieb Organization.