Legislative Update

September 15, 2021

Since the November 2020 elections, we have closely followed the political climate for potential changes to the estate and gift, capital gains, individual income, and corporate income tax laws.

On Monday, September 13, 2021, House Democrats released their tax proposals, and we wanted to make you aware of the following highlights:

Estate and Gift Tax:

  • President Biden had proposed to end step-up in basis and tax unrealized capital gains at death.  Neither are included the House plan.
  • In the proposal, the current estate and gift tax exemption ($11,700,000) will revert to $5,000,000, indexed for inflation since 2010.  This change will occur effective as of January 1, 2022.
  • Grantor trusts (where the grantor is treated as the owner for income tax purposes but often structured to be excluded for estate tax purposes) will be included in the estate of the grantor for estate tax purposes.  Also, sales between the grantor and the grantor trust will be recognition events for income tax purposes.  Both provisions would apply to trusts established and sales to trusts implemented after the enactment date of the new law, which seems to imply that existing grantor trusts and prior sales to grantor trusts will continue to be treated as non-income tax events under prior law.
  • Valuation discounts (for minority interests and lack of marketability) will be eliminated for transfers of non-business assets.  This provision would apply to transfers made after the enactment date of the new law.

Capital Gains Tax:

  • The tax rate on capital gains increases from 20 to 25 percent for those making over $400,000 (single) and $450,000 (married filing joint).  With the current 3.8 percent net investment income tax, the top capital gains tax rate will be 28.8 percent.
  • The rate would apply to sales after September 13, 2021.

Individual Income Tax:

  • The House plan raises the top income tax rate from 37 to 39.6 percent beginning in 2022, but this tax rate also applies to more income of the taxpayer than the current tax rate.  Currently, the 37 percent tax rate applies to income at $523,000 for single tax filers and $628,000 for married couples.  Under the House plan, the tax rate will kick in at $400,000 and $450,000 respectively ($225,000 for married filing separate).
  • There is a new 3 percent surtax for those making over $5,000,000 of income for married couples and $2,500,000 for single or married filing separately.
  • There is also a new 3.8 percent tax on small business owners with more than $400,000 of pass-through income who pay the individual income tax.
  • Currently, business owners who pay the individual income tax, receive a 20 percent deduction for their qualified business income. This deduction is ended for business owners with more than $500,000 in a joint return and $400,000 for a single taxpayer.
  • The House plan would repeal Roth conversions in individual retirement accounts and 401(k) type plans for those making over $400,000 (single) and $450,000 (married filing joint).

Corporate Tax:

  • The House is proposing to raise the top corporate tax rate from 21 to 26.5 percent for income above $5,000,000.

If the proposed reduction of the $11,700,000 estate and gift tax exemption to $5,000,000 plus inflation is enacted, we are in a “use it or lose it” scenario with respect to the use of the current larger exemption. While there is no guarantee that the proposed changes will become law, we wanted to share these proposed changes as you consider your tax and estate planning.

We continue to monitor changes in tax policy and take a proactive and flexible approach to take advantage of opportunities within the context of a client’s overall financial plan.  As an example, we recently accelerated the rebalancing of certain equity positions given feedback that the effective date of an increase in capital gains rate would be mid-September.

To learn more, or to discuss or review how these proposals might impact your family, please contact us.