Act now to avoid taxes later
May 14, 2021 | What A Ride
Given the current federal deficit and proposed spending, it is only a matter of time before tax rates are increased. A commentary prepared by First Trust Portfolios expects a tax hike effective January 1, 2022, which would include:
1. An increase to the top individual tax bracket,
2. A higher corporate tax rate,
3. An increase in the capital gains and dividends rate, and
4. A lower exemption for the estate tax.
If you have considered transitioning ownership of your business, you should act sooner, rather than later. The current estate tax exemption allows for just over $11.5 million per person to be gifted during their lifetime without tax. Ten years ago, the amount was $5 million and fifteen years ago, the amount was $2 million. Would the new limit return to a $2 million level? That remains to be seen. However, if you own assets over $2 million and wish to move this wealth to the next generation, you should start discussions with a professional adviser on gifting options before the tax change is implemented.
Alternatively, if you have considered selling your business, it may be beneficial to start that process now to avoid paying a higher capital gains tax rate on the sale proceeds. Taking a company to market and completing a sale will typically take at least six months and could take longer. The process of selling to your employees through an employee stock ownership plan (“ESOP”) is a bit shorter because the buyer is already known. It is better to start early in the year, however, to have time to deal with any complications that may arise.
By acting now, you may still be able to implement your business succession strategies before the higher tax rates kick in. Contact your professional advisors before the window to complete the process closes.