Complete Wealth Management With Dave Alison

Kamala Harris Tax Proposal Broken Down - August 2024

• Dave Alison, CFP®, EA, BPC • Season 1 • Episode 22

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On August 16, 2024, Presidential candidate Kamala Harris released details of her economic and tax plan. Bob Keebler analyzes the estate and gift tax proposals contained in the proposed American Housing and Economic Mobility Act of 2024. 

In this video, we will break down the income and estate tax considerations of her proposal.

We will discuss:
➡️ Exempting Tip Income from Taxation
➡️ Expanding Tax Credits for Families
➡️ Housing Tax Incentives
➡️ Clawing Back Deductions
➡️ Corporate Income Tax Rate
➡️ Higher Tax Rates
➡️ Capital Gains Tax Reform
➡️ 32% increase to Medicare Tax for people earning over $400k
➡️  Additional Tax on Retirement Accounts over $10m & earnings over $400k
➡️  Financial Transaction Tax
➡️  Apply wash sale rules to Crypto and digital assets
➡️ Limiting Like-Kind Exchanges to $500k
➡️ Reducing the Estate & Gift Tax Exemption Amount
➡️ Increasing the Estate Tax Rate
➡️ Eliminating the Step Up in Basis for Grantor Trusts
➡️ Reducing the Annual Gift Exclusion to $10,000 with an annual cap of $20,000 per person
➡️ Creating a 10-year life for GRATs and imposing a 10% remainder interest
➡️ Ending Grantor Trusts
➡️ Limiting Discounts on Certain Assets
➡️ Imposing a Surtax on high income trusts and estates of 5% for AGIs over $200k and another 3% for AGIs over $500k
➡️ A minimum 25% tax on total income (inclusive of unrealized capital gains) for taxpayers with wealth greater than $100 million

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Speaker 0:

Hello everyone, this is Dave Allison, founder and CEO of Allison Wealth Management, and on August 16th, presidential candidate and current vice president, kamala Harris, released her tax and economic plan, and we want to unpack how that could impact individuals in this video. So let's start off with income taxes. Some of the proposals that Kamala Harris is recommending are exempting tip income from taxation, so if you're in the service industry, that could be a positive for you not having to pay tax on your tip income. She has proposed expanding tax credits for families, and so what that would look like is that there's an expansion of the child tax credit up to $6,000 for children under the age of one, $3,600 for children ages two to five and $3,000 for older children. She'd also like to expand the earned income tax credit for filers who don't claim children and premium tax credits, and so those are just some considerations that could bring about more tax credits to families with younger children. She's proposing several housing tax incentives that she wants to be able to expand housing tax credits, including low-income housing tax credits, a tax credit for new homebuyers and a credit for the construction of started homes, so things that could help create more affordable housing. Now how those things are going to get paid for is that she's recommending we claw back several current income tax deductions. These deductions could be things like depreciation and interest for certain rental construction investments and other itemized deductions, particularly for higher income taxpayers.

Speaker 0:

She's recommending some changes to corporate income tax rates. Right now, corporations are taxed at a 21% tax rate. She's recommending that go up to 28%. And remember corporations face double taxation because the corporation is taxed today at 21%, but then the money distributed from the corporation to the shareholders is taxed again. Corporations have a double tax. A lot of people say corporations don't pay their fair share, but they're forgetting that corporations are double taxed and you need to account for both of those. And then, last but not least, there's a lot of higher tax rates in her proposals.

Speaker 0:

So there's really three components of this. Number one is she is in favor of the sunsetting of the Tax Cuts and Jobs Act. She's really in favor of it, sunsetting for anyone who's earning over $400,000 a year of income, but the reality of it is these tax cuts are scheduled to sunset at the end of next year for everyone. It doesn't matter if you're a lower income individual or family or a high earning family. These tax cuts are scheduled to sunset for everyone. Unless there's bipartisan agreement to pass new tax law which, if Kamala wins the presidency and the Democratic Party takes over the House and the Senate, that could certainly come to fruition. But if we have a divided House and Senate like we do right now, it might be very hard for Kamala to pass any of this tax reform. So that's really important to note when you think about these presidential policy. Proposals is all they are are proposals. There's checks and balances that it has to also pass Congress through the House of Representatives and the Senate in order to actually become a law.

Speaker 0:

But when we talk about higher tax rates, there's really a couple things that stand out here. Number one is that she wants to increase and create a new tax bracket for anyone earning over $500,000. That would be a tax rate of 45%. So if you think about it, right now the highest tax rate is 37%. When the Tax Cuts and Jobs Act sunsets at the end of next year, that 37% will go up to 39.6% for those top earning households out there. But then, in addition to that, she's proposing another rate of 45% for income starting at $500,000. That would be a very substantial tax increase to anyone over $500,000 of income. But again, it's not just the top tax rates. With the sunsetting of the Tax Cuts and Jobs Act, anyone in the lowest bracket of 12% will go into a 15% bracket, so there will be a 3% tax increase there. Anybody who's in the 22% bracket will get bumped up to either the 25% or 28% bracket, and then anyone in that 24% bracket will get bumped up into a 28% or higher bracket. And so under these changes number one, assuming there's no new tax laws passed this year or next year taxes are scheduled to go up for almost everybody out there and if she is successful at some of these proposals, there could be substantial tax increases for anyone over $400,000 of income.

Speaker 0:

In addition to that, continuing on the income tax reform proposal, she's suggesting reform to capital gains. This is where you make an investment and hopefully that investment grows in value over time and eventually you sell that investment for a gain. You have to pay tax on the gain. So, for example, if you bought a $500,000 home and that home value doubles, then you have a $500,000 capital gain that could potentially be subject to tax. So currently the capital gains tax rates are 0% for some lower income taxpayers, 15% for most taxpayers that are of modest income, and then 20% for high income taxpayers. Plus there's an additional 3.8% net investment or Medicare tax on top of that for any taxpayer who earns over $250,000.

Speaker 0:

Well, in her proposal they're talking about increasing capital gains from 23.8% at the top rate all the way up to 44.6%. That's just at the federal level. Of course there's state capital gains taxes as well. So, for example, our clients in California, between federal and state, they could look at a capital gains tax as high as 59% under this proposal. If you're in New Jersey, that could be as high as 55.3. If you're in Oregon, as high as 54.5. So, very substantial increases to the capital gains tax. And you have to remember the reason that policy calls for a preferential tax rate on capital gains is they want to incentivize people to make investments. When you incentivize people to make investments, it helps drive the economy. If you increase that tax on capital gains, it disincentivizes people from making that investment. She's also calling for a 32% increase in Medicare tax for people earning over $400,000. Thousand dollars. So again, if you account for the income tax, which could be as high as 40 to 45 percent, plus you add in payroll tax, which is inclusive of Medicare tax, you can really start to see that for anyone over four or five hundred thousand dollars, 50, 55% of their paycheck could easily be going to income tax.

Speaker 0:

She's proposing an additional tax on retirement accounts. For large retirement accounts, if you've been successful enough to amass over $10 million in an IRA or a Roth IRA or a 401k, or you have earnings over $400,000 in retirement, she's proposing additional taxes. She's proposing a financial transaction tax, which would be on trading stocks. There'd be a 0.2% transaction on stock trades, a 0.1% transaction tax on bond trades, so that would erode some of your investment performance due to taxation. She's suggesting that we should apply wash sale rules on cryptocurrency transactions and digital assets. I've explained that in other videos, but if you're into crypto, definitely give us a call because that could impact your tax situation. And then she's limiting like-kind exchanges to 500,000. Like-kind exchanges are a strategic move for real estate investors to be able to continue to defer taxes, and it's a way that many families get very wealthy off of real estate and don't have to pay a tax when they sell or exchange properties, and so she would look to try to restrict that tax strategy of deferral to $500,000.

Speaker 0:

She's also proposing some pretty substantial changes to the estate and gift tax exemptions and this would impact many, many, many families. So under current law, there's a tax when you pass away if you have a certain net worth Individually. Right now that number is $13.61 million, so this tax does not impact many people. A married couple could have over $27 million and never be subject to the estate transfer tax, or they could gift up to $13.6 million in their lifetime and not be subject to any tax. So, again, most people aren't subject to this. But under her proposal they are proposing that we lower this exemption amount to $3.5 million per individual. That would be about $7 million for a married couple. So if you add up your total net worth of your estate value, that would be your home, your real estate, your investments, your retirement accounts, your business interests, the death benefit of any life insurance, even if it's group insurance at your employer or term life insurance. All of that accounts for your taxable estate. And if you have a taxable estate over $7 million, you could now be subject to this estate and transfer tax upon your passing, if this actually made its way into law.

Speaker 0:

She's also increasing, or proposing to increase, the estate tax rate. The current rate is 40%. So, again, for any of those families that have over $27 or $28 million, any amount over and above that would be taxed at a 40% rate, would be taxed at a 40% rate. Now, under Kamala's proposal, anyone with over $3.5 million would be subject to an estate tax rate of between 55% to 65%. So an incredible increase in estate and transfer tax. So any families, $7 million or more. This is something that you should be considering around how to structure your estate utilizing trust vehicles, utilizing life insurance, utilizing annual gifting to family members to help mitigate this potential tax. Because, if this does get enforced, we have a time period now until the time that this tax law went into place to do some really strategic planning, given how high the exemption is today.

Speaker 0:

She's also recommending that we eliminate the step up in basis for grantor trusts. So a lot of the trusts that we use in estate planning are grant or trust, which means that the person granting the money into the trust is going to be subject to the tax liability of the trust. A lot of those trusts receive a step up in basis. That means that the beneficiaries of the trust won't have to pay tax on all the gain and if that gets eliminated, it could be a tax time bomb for those beneficiaries that have highly appreciated assets in these types of trust vehicles. And then, last but not least, she's proposing we reduce the annual gift exclusion to $10,000.

Speaker 0:

Many of our clients gift money to their children or other family members to support them. This today allows them to gift up to $18,000 to as many people as they want, without any cap on how many people they could gift that to. So a married couple could gift $36,000, 18,000 times two to as many people as they want. If they gift 36,000 to a married couple, they can gift 72,000 to that married couple because there's two people gifting to two people. Now, under Kamala's proposal, she wants to reduce that annual exclusion amount to $10,000 and put an annual cap of $20,000 per person. So that's drastically different. Imagine a grandparent who's helping out five grandchildren with college education. Well, instead of being able to gift $18,000 to each of his five grandchildren, he would be capped at $20,000 to spread out amongst all five grandchildren. So this is going to dramatically change planning if that became law.

Speaker 0:

Some more advanced strategies regarding estate planning is she wants to create a 10-year life for a grantor, retained annuity trust and impose a 10% remainder interest. If you have a grad or were thinking about one, I'd highly recommend chatting with our team. She's talking about ending the grant or trust status. This would be a huge change to estate planning overall. She's talking about limiting discounts on certain assets. This is where sometimes a closely held or non-marketable business is able to achieve a valuation discount for estate planning. And then, last but not least, she's talking about imposing a surtax on high income trusts and estates of 5% for adjusted gross incomes over $200,000. And an additional 3% for AGIs over $500,000. So again, that would be a big increase in taxes to individuals who have trust for their family.

Speaker 0:

Last but not least, something that I think is almost unthinkable is a wealth tax. This is a minimum 25% tax on total income for taxpayers with wealth greater than $100 million. Now you might say well, who cares? They have over $100 million. The reason I say this is unthinkable is she is proposing that this is inclusive of unrealized capital gains, which, in my opinion, is almost unworkable and probably unconstitutional.

Speaker 0:

But let me give an example. Let's say we have a business owner, family-owned business. They've worked for 50 years. That business is bringing in $10 million of net income. It's got a value of over $100 million. They employ 700 employees, so they're doing a great job for the economy, creating jobs, paying all these employees, but because that business has a value of over $100 million, which is an unrealized capital gain, that owner is not selling the business, they're running the business. They would owe an income tax of 25% just because they have a business that's valued over $100 million, but they don't have that $100 million because they're not selling the business, and so this is something that would impact many business owners, many privately held companies, many businesses that have substantial real estate, anything that doesn't have liquidity associated with it.

Speaker 0:

Again, this is something that's probably far stretched to actually make its way through Congress, but something she is proposing because her objective is to try to raise $5 trillion of additional tax revenue over the next 10 years to support some of the initiatives and the social policies that she has.

Speaker 0:

So, again, this is not political. This is just the facts of her current proposal, so that you can help look at some of these things and how they could impact your personal financial situation. This is stuff that we work with families on, day in and day out, to have a plan in place so that, if some of these things do come to fruition, that you're not blindsided, that we've helped protect what's taken you a lifetime to accumulate. So if you want to schedule a complimentary strategy session with our team of financial subject matter experts, tax advisors, estate planning resources, reach out. Go to alisonwealthcom. Book a 25-minute introductory call and wealth experts and advisors to help you navigate not only what the current laws are, but ultimately what future tax changes could bring for your family, so that we could ultimately help you reduce your lifetime tax liability. Thank you.

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Dave Alison, CFP®, EA, BPC

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