New Tax Proposals - Good News for Most Taxpayers - Not Much is Scheduled to Change
November 2021 Update
President Biden’s new tax proposals to the Build Back Better Act are expected to go to the floor of the House of Representatives for a vote in November. After that, the bill will go to the Senate where a lot of hard bargaining is anticipated.
Between the first draft of the Act published in September and the most recent draft, published October 28th, there have been dramatic changes – almost all of them in the taxpayer’s favor. There is no guarantee, however, that this legislative pendulum may not swing away from the taxpayers when the Act goes to the Senate. We have therefore included some commentary on the prior proposals least they re-appear in the Senate version of the Act.
Income and Capital Gains Taxes
Latest Proposal: No increase to the top tax rate and no change to the top bracket threshold. Where taxable income in any year exceeds $5M ($10M for MFJ) a 5% surtax would be applied.
Prior Proposal: Increase the top tax bracket rate and lower the bracket threshold
The prior proposal would move the top tax rate for ordinary income from 37% to 39.6%. The ordinary income thresholds at which the top rate applies would be lowered as follows
- Married Filing Jointly: Top bracket would apply to incomes in excess of $450,000 (versus $628,000 for 2021)
- Single filers: Top bracket would apply to incomes in excess of $400,000 (versus $528,000 for 2021):
Latest Proposal: No change to the long-term capital gains tax rate
Prior Proposal: Replace the 20% long-term capital gains tax with a 25% rate where total taxable income exceeds approximately $501,000. Rates remain the same for gains realized prior to September 13, 2021
Estate and Gift Taxes
- No change to the Unified Lifetime Estate and Gift Tax Exemption Amount – Currently $11.7M per person
- No change for the use of Grantor trusts in estate planning
- Where the taxable income of any trust exceeds $200K a 5% surtax would be applied in addition to the usual income tax rates for trusts
- No change to the automatic “Step-Up” in basis for inherited assets
- Reduce the Unified Estate and Gift Tax Lifetime Exemption Amount by 50% from the current $11.7 million per person ($23.4 million for married couples)
The unified lifetime exemption amount applies both to lifetime gifts you make and to your estate upon your death.
Limit the tax advantages of Grantor Trusts for estate planning
Making transfers to a grantor trust would no longer remove the asset from your taxable estate for estate tax purposes.
The types of trust that could potentially be affected are intentionally defective grantor trusts (IDGT), grantor retained annuity trusts (GRAT), spousal lifetime access trusts (SLAT), qualifying residential property trusts (QRPT), and life insurance trusts. If this proposal becomes law, there'll be changes in terms of the tools you can use to remove assets from your taxable estate.
Latest Proposal: There were no proposed changes to the taxation of retirement plans in the current iteration of the Act.
Previous Proposal: Prohibit all after-tax IRA contributions from being converted to Roth accounts (“Back-Door” Roth technique), regardless of income level
Prohibit all employee after-tax IRA contributions in qualified plans after January 1, 2022
Other Current Proposed Tax Measures
- Reduce the Exclusion for Qualifying Small Business Stock (QSBS) from 100% to 50%
- Limit the use of Excess Business Losses to off-set non-business income
- Impose the Net Investment Income Tax (NIIT) of 3.8% on profits from a pass-through entity such as an S-Corp, LLC, or Partnership
Currently Not Proposed to Change
- No removal of the SALT (state and local tax) cap deduction limitation – remains $10,000. Although this was a campaign promise, the latest proposals do not mention this change specifically. However, we do expect the deduction to go back to $20,000 after the negotiations in the Senate.
- No change to the 1031 Like-Kind Exchange rules.
- No change to the carried interest holding period for capital gains treatment.
While the final guidelines and timing of the legislation are to be determined, it’s prudent to begin talking to your financial advisor, tax advisor or accountant, and estate planning attorney. Please contact BakerAvenue to help you review your options and to be ready to make changes as necessary.