Author: Suzanne Shier
The cost of COVID-19 is immeasurable, and we will be experiencing the after-effects for years, maybe decades, to come. The toll on human capital is difficult to comprehend. The impact on government treasuries is, on the other hand, quantifiable. And unlike the federal government, state and local governments actually have to balance their budgets each year. They do not have the luxury of continuing deficit spending.
What does all of this mean for taxes? You know. We don’t have to tell you. They will increase. All types of taxes at all levels of government. This includes income taxes, gift and estate taxes, sales taxes, so-called “sin” taxes – taxes come in many forms. Countries around the world have already implemented or are in the process of enacting Covid-19 related taxes.
What does this mean for U.S. taxpayers? For wealth accumulators? For wealth transferors? It means that tax and wealth planning of all types are as or more important now than they have been for a very long time. The time to plan is now, not later. Consider –
- The benefit of using the historically high, unprecedented and unsustainable $11.7 million dollar estate and gift tax exclusion in 2021. We expect the exclusion to decrease, when and by how much is yet to be seen, but the impact will be material. By way of example, consider a U.S. couple with a combined estate of $30 million.
- Scenario 1. The couple fully utilizes their combined $23.4 million exclusion currently with family gifts, leaving a taxable estate at the death of the survivor of $6.6 million. The federal estate tax will total $2.64 million and the net to family will be $27.36 million.
- Scenario 2. The couple does not utilize their current combined $23.4 million exclusion. The exclusion decreases to $5 million, adjusted for inflation. Assuming an inflation adjusted amount of $6.52 million, or a combined $13.04 million, federal estate tax will total $6.784 million, leaving $23.216 million for the family.
- Scenario 3. The couple again does not utilize their current combined $23.4 million exclusion, and the exclusion drops even further, to the 2009 level of $3.5 million, with no inflation adjustment. Federal estate tax will total $9.2 million, leaving $20.8 million for the family.
Of course, there are many underlying assumptions and factors that cannot be definitively predicted. But the core message is clear. Failure to act will have a cost – between $4.14 million and $6.56 million in these simplified examples.
- The benefit of making a transformational charitable gift in 2021. The past year has been one of extreme hardship for countless people. The need is real, and it is prevalent. There has been a redeeming out-pouring of generosity in many sectors. Yet it is estimated that one-third of not-for-profits will be shuttered as a result of the pandemic. Jobs lost; services terminated. At the same time, markets have surged and for many, net worth has increased. For 2021 (and 2020), the 60% of adjusted gross income limit on income tax deductible cash gifts to public charities has been lifted. Donors may make income tax deductible cash gifts up to 100% of taxable income to qualifying charities in 2021.
- The benefit of evaluating where you (and your trusts) reside in 2021 and beyond. State coffers are strained. Many states are reevaluating the sources of their tax revenue. Currently, state income tax rates range from in excess of 13% to 0%. While we do not consider taxes to be the singular reason to relocate, disrupting relationships with family, friends, medical providers and others, when evaluating a move, taxes are one of the factors to consider. Expect “home” state tax authorities to take a hard look at changes from resident to non-resident status. Plan ahead and pay attention to the details for a successful change in state of tax residence.
Do we think the sky is falling? No.
Are we optimistic about the future? Yes.
Do we encourage our clients to plan today for a better tomorrow? Absolutely.