Wealth managers handling the business assets of individuals with high and ultra high net worth, will face new challenges starting this tax year 2021 and onwards. Aside from tax policy changes being proposed by the Biden administration, a new bill aimed at changing the IRS’ audit behavior toward the tax returns of wealthy taxpayers will also be introduced. Given that Democratic party lawmakers now have the majority numbers in both lower and upper houses of Congress, all bills proposing such tax policy changes will likely be enacted.
Now more than ever, choosing the right financial advisor to handle one’s tax plans is of utmost importance.Most of the proposed changes will impact major tax investment strategies conventionally used by tax planners and wealth managers. That being the case the cookie-cutter approach in managing the business assets of high net worth individuals, particularly those with ultra high net worth will no longer be effective.
Customization of Financial Plans is the Key to Effective Wealth Management
The key to effective wealth management is by customizing tax plans and investment strategies in accordance with the actual business conditions and true circumstances of the wealth owners and their families. That way, the financial plans and strategies will be aligned not only with the short and long term financial goals of every wealthy family; but will also conform to their current personal needs.
Moreover, in the event that IRS audit examiners put extra attention to the income tax returns filed by taxpayers who derive most of their income from investing their assets, the customized solutions will be proven legal and valid. .
Tax Policy Change On Sale of Investments Will Impact Conventional Tax Reduction Strategy
In general, America’s super rich are categorized based on their asset holdings, the wealthiest group being the high net worth individuals and the ultra high net worth individuals. Mainly because most of their earnings come from sale of long term asset investments, which under the U.S. taxation system is subject to Capital Gains Tax. When compared to the ordinary Income tax rates applied to revenues earned by business proprietors and employed individuals, the Capital Gains Tax rate is lower, of which 20% is the highest.
The Capital Gains Tax rate could even be whittled down to 0% if after deducting capital losses the taxable income for the year falls under the lowest tax bracket.
However, this is about to change under the Biden administration when the tax policy that aims to make equal, the tax treatment on revenues earned as compensation by salaried workers and revenues earned by wealthy investors. Taxable income on investment gains, if exceeding $1 million, will be subject to the tax rate applicable to the ordinary Income Tax Rate That is regardless of whether the assets sold (e.g.: bonds, precious metals, real estate or stocks) were held for more than a year by the wealthy investor.
This denotes therefore that gains from sale of investments exceeding $1 million will be subject to the top individual tax rate of the highest tax bracket. For the year 2021, the top tax bracket has been adjusted to $523,600 and $628,300 for single taxpayers and jointly filing married couples, respectively.
Actually, what has bee cited above is only one of the major tax policy changes under the new government administration In fact another significant change is the reversal of the top individual tax rate of 37% back to the 39.6%, which was the tax rate before the Trump administration enacted the 2017 Tax Cuts and Jobs Act.
