On September 13, 2021, the House Ways and Means Committee Chairman Richard Neal released details of tax proposals currently being considered as part of the budget reconciliation legislation that is now being developed. These are mostly tax increase proposals and are projected to raise about $2 trillion over 10 years. We are certainly a long way from any final legislation and there are likely to be many changes, but here is a shortlist of some key provisions:
- Increasing the top individual income tax rate from 37% to 39.6% applicable to taxable incomes over $400,000, effective for tax years beginning after 12/31/2021
- Increasing the top corporate tax rate from 21% to 26.5% for income over $5 million, with graduated rates of 18% applied to income under $400,000 and 21% for income from $400,000 to $5,000,000, effective for tax years beginning after 12/31/2021
- Increasing the tax rate on capital gains and qualified dividends from 20% to 25%, effective for tax years ending after September 13, 2021. A transition rule would retain the 20% rate for capital gains and dividends recognized by that date
- Digital assets, as well as commodities and currencies, would now be treated as assets subject to the wash sale rules. In addition, the constructive sales rules would be amended to include digital assets, both provisions effective for tax years beginning after 12/31/2021
- Impose a 3% surtax on individuals, trusts and estates where the modified adjusted gross income over $5 million for a joint or individual return ($2.5 million for married filing separately) or $100,000 for an estate or trust, for tax years beginning after 12/31/2021
- Place limits on one estate-and-gift tax planning strategy, which would cause a grantor trust to be taxed as part of a decedent’s estate when the decedent is the deemed owner of that trust. The bill would eliminate the use of “intentionally defective grantor trusts” which have been used to transfer wealth without incurring estate tax and would treat a sale to a grantor trust as a taxable transaction
- Restrict the use of discounts that reduce the value of wealthy families’ assets for estate and gift tax purposes by disallowing discounts for “passive” assets
- Restrictions on syndicated conservation easement transactions, disallowing deductions if the amount of the contribution exceeds 2.5 times the partner’s tax basis in the partnership – to be applied retroactively for up to 5 years and increasing penalties up to 12 years back
- Impose new limits on large IRAs, preventing additional contributions to IRAs where the total value exceeds $10 million, and increasing required minimum distributions to 50% of the excess of an IRA balance over $10 million
- Eliminate certain “backdoor” Roth IRA strategies
- Restricting the Qualified Business Income deduction (Section 199A) from pass-through entities to a maximum of $500,000 for a joint return, $400,000 for an individual
- Applying the 3.8% net investment income tax to net income from pass-through entities for taxable incomes of $500,000 for a joint return (including trusts or estates) and $400,000 for individuals
- Increasing the required holding period for carried interests to qualify for capital gains treatment from 3 years to 5 years
- A number of international tax changes that will result in higher rates on foreign income; these include provisions related to global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), the base erosion and anti-abuse tax (BEAT), subpart F in general, and limits on interest deductions
- This provision terminates the temporary increase in the unified credit against estate and gift taxes, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation.
What’s NOT in the Bill
One surprise was that there was no mention of Biden’s proposal to eliminate the tax-free step-up in basis of assets for estates, considered by many as a loophole allowing appreciation on assets to avoid ever being taxed. Apparently, there wasn’t enough support with House Democrats to push this through.
Another item not in the bill is action on the $10,000 state and local tax (SALT) deduction limitation, to either raise the cap to perhaps $20,000 or repeal it altogether. This is still being debated. A major issue with changes to the SALT limitation is that such changes would primarily benefit high-income taxpayers.
Action Items
The new rules for grantor trusts would only apply to future trusts or transfers occurring after the bill is enacted so assets in existing trusts should be grandfathered and not subject to the new rules. Although it’s hard to tell how much of this will become law, there may be times-sensitive items where it could be beneficial to take action now, such as making gifts before December 31, 2021, finalizing any pending transactions with grantor trusts, among others. If you need help in evaluating how this potential tax legislation may affect you, please contact us.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
