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October Quarterly Newsletter - 2021

Highlights of this Newsletter:

  • Government-Approved Inter-Family Loan Rates

  • LVM's Sahana Madhanagopal passes CFA Level III exam!

  • Congress and the President Look at Numerous Tax Increases

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Government-Approved Inter-Family Loan Rates

Logic might tell you that any loans you make to family members would be a personal matter,

without requiring the government to get involved. But whenever has the tax code followed logic?

The key issue to remember, with the Internal Revenue Service involvement in family loans, is that

the IRS wants to be able to calculate gift taxes against the amount you would ultimately owe in

estate taxes when you pass on assets to your heirs. If you were to make a no-interest loan to a son

or daughter, the IRS would count the amount of interest you would be foregoing as a gift. If you

DO charge interest, the amount of interest would need to be reasonable in the eyes of the


What’s reasonable? The government monitors interest rate movements in the marketplace, and

calculates minimum applicable federal rates (AFR) for loans covering different time periods,

posting them on its website. (You can find this month’s rates here: If you charge family members or heirs less than this rate, then the government would calculate the difference, and that would be counted as a gift to the family member to whom you made the loan.

These rates are pretty low: a short-term AFR (up to 3 years) in September 2021 is 0.17%; the AFR on

loans of 3-9 years is 0.86%, and anything over 9 years would have a rate of 1.71% to 1.73%,

depending on whether the interest is being paid back yearly, quarterly or monthly.

Note that these rules don’t apply to loans of less than $10,000 that are not used to purchase

income-producing property. And if you don’t want to go through the hassle of charging interest,

you could always calculate (or have a professional calculate) the implied interest payments, and

then offset that amount with your $15,000 annual gift exemption to the borrower. But even then,

it’s a good idea to document the terms and stated interest rate in case the IRS ever decides to come back and do an audit.

Congratulations to Sahana!

We are happy to announce that our employee, Sahana

Madhanagopal, has passed level III of the CFA exam

conducted in May 2021.

Sahana’s accomplishment is even more impressive as the pandemic disrupted the exam schedule last year and the pass rates dropped to historic lows across all three levels of the exam. For Level III, which Sahana passed, the pass rate was only 42% versus a 57% historical average. For levels I and II of the CFA exam, the pass rates were only 22% and 40%, respectively. COVID definitely had an impact.

Sahana joined LVM in January 2020 as a Research Associate after graduating from Western Michigan University with an MBA in Finance. Her responsibilities involve conducting

research on topics including the economy, financial markets, equity securities, fixed income securities, and alternative assets for investment opportunities for our clients.

Congress and the President Look at Numerous Tax Increases

There are many tax proposals floating around Congress as it seeks to find additional revenue to support its unprecedented spending. Many of these proposals will never even come up for a vote, and those which do may or may not ultimately be enacted into law. However, it is prudent to be aware of some of the tax law changes under consideration for your own planning purposes.

The House Ways and Means Committee has released a draft of proposed changes to retirement accounts, including adding income limits for conversions and eliminating the back-door Roth conversion strategy. Eliminate Back-Door Roth Strategies. The proposal would prohibit after-tax IRA and plan contributions from being converted to Roth, regardless of income level. This would eliminate the back-door Roth IRA conversion strategies which many clients have been using to their advantage. This proposal would be effective for 2022.

Income limits on Roth Conversions. Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, and married taxpayers filing jointly with taxable income over $450,000, would be eliminated. However, this proposal would not be effective until 2032.

President Biden’s American Jobs Plan includes an increase in the corporate tax rate from 21% to 28% and the American Families Plan includes massive tax increases on the wealthy. Because the American Jobs Plan and American Families Plan are merely starting points for negotiation, it’s unclear which of these provisions, and in what form, will make the final bills.

The proposed changes include:

• Increasing the corporate income tax rate from 21% to 28%;

• Adding a 15% minimum tax on the book income of large companies;

• Increasing the tax rate on individuals making over $400,000 from 37% to 39.6%;

• Eliminating the step-up in basis at death for gains in excess of $1,000,000 ($2,500,000 per couple);

• Increasing the tax rate for dividends and capital gains for individuals making over $1,000,000 from

20% to 39.6%;

• Eliminating 1031 exchange when gain exceeds $500,000;

• Reinstating the “Pease” limitation on itemized deductions; and

• Taxing carried interest as ordinary income.

Other Democrat proposals this year included a reduction in the estate tax exemption to $3,500,000 and the gift tax exemption to $1,000,000 (both currently $11.7 million).

Due to the uncertainty associated with the specific proposals, we are recommending that clients consider the following:

• Consider recognizing capital gains in 2021.

• Consider accelerating income recognition. If you have deferred income, consider recognizing now at lower tax rates. Another opportunity may be converting an IRA to a Roth IRA while it remains an option.

• Consider donating appreciated assets to a charity, donor-advised fund, or charitable trust. This can provide a charitable deduction while also eliminating or deferring possible capital gains tax liability.

Plan now for giving away your remaining $11,700,000 gift exemption. If you don’t already have one or more irrevocable trusts in place, now is the time to start creating your plan and opening bank accounts in the new trust. In this manner, if a change to the estate tax law is part of a final bill, you will be in a position to quickly move forward with your gifting plan.

While these changes are currently just proposals, taxpayers have been put on notice. No one knows for sure what Congress will do, but given the current climate in Washington, changes like these could have some traction. Stay tuned!

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