On Monday, September 13, the House Ways and Means Committee proposed a series of tax increases and changes. Although we do not know which of these provisions, if any, will become law, we have highlighted below some of the provisions that we are closely monitoring. If you are interested in opportunities to minimize the impact of these changes if they occur, please contact us as soon as possible.
Individual Income Tax Proposals
- Increase in Individual Tax Rates. The proposal would increase the top marginal individual income tax rate to 39.6% (from 37%) and would be applicable to married individuals filing jointly with taxable income over $450,000; heads of household with taxable income over $425,000; unmarried individuals with taxable income over $400,000; married individuals filing separately with taxable income over $225,000; and estates and trusts with taxable income over $12,500. The change would be effective for taxable years beginning after December 31, 2021.
- Increase in Capital Gains Rates. The proposal would increase the capital gains tax rate for individuals earning $400,000 or more to 25% (from 20%). This change would be effective as of September 13, 2021, subject to binding written contract exclusion.
- New High-Income Surcharge. The proposal would impose a 3% tax on a taxpayer's modified adjusted gross income in excess of $5 million (or in excess of $2.5 million for a married individual filing separately). This surcharge tax is in addition to the above-proposed rate increases. This would be effective for taxable years beginning after December 31, 2021.
- Expansion of Net Investment Income Tax. The proposal would expand the 3.8% net investment income tax (NIIT) to active business income for taxpayers with taxable income greater than $400,000 for single filers and $500,000 for joint filers. This proposal would be effective for taxable years beginning after December 31, 2021.
- Qualified Small Business Stock. The proposal would reduce the 75% and 100% exclusion rates for gains realized from certain qualified small business stock (QSBS) to 50% for trusts, estates, and taxpayers with adjusted gross income of $400,000 or more. This would apply to sales and exchanges after September 13, 2021, subject to a binding written contract exclusion.
- Other proposals. There are other proposals that would limit certain deductions and losses and impact the taxation of carried interests. We are happy to discuss these proposals in greater detail.
Estate and Gift Tax Proposals
- Early Reduction of the Estate, Gift, and Generation-Skipping Transfer Tax Exemptions. The proposed change would reduce the available estate and gift tax exemption and the generation-skipping transfer tax exemption from the current $11.7 million per person (adjusted for inflation) to $5 million (adjusted for inflation). The change would apply to estates of decedents dying after December 31, 2021 and gifts made after December 31, 2021.
- Changes to Valuation Discounts. The proposal seeks to deny valuation discounts on the transfer of nonbusiness assets for estate, gift, and generation-skipping transfer tax purposes. This proposal would be effective for transfers after the date of enactment of legislation.
Grantor Trust Proposals
The proposal makes significant changes to the rules regarding "grantor trusts," the assets of which are treated as owned by the grantor for income tax purposes. The proposal would be effective for grantor trusts that are created or funded after the date of enactment of legislation.
- Estate Inclusion. The proposal would require "grantor trusts" to be included in a decedent's taxable estate when the decedent is the deemed owner of the trust. Currently, assets held in many types of commonly used grantor trusts are excluded from the deemed owner's taxable estate at death.
- Transactions Recognized. The proposal would treat sales between a grantor trust and such trust's deemed owner as equivalent to sales between the deemed owner and a third party. Under current law, such sales transactions are disregarded for income and capital gains tax purposes.
Retirement Account Proposals
- Contributions to and Required Distributions from IRAs. The proposal would prohibit new and future contributions to Roth and traditional IRAs for a tax year if the total value of the account is over $10 million at the end of the prior tax year. The proposal would further require distributions once the value of the retirement account reaches a certain level. This restriction would be effective for tax years beginning after December 31, 2021.
- Roth Conversions. The proposal would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000. This proposal would apply to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.
It is worth noting some of the proposals previously discussed by lawmakers that are not included in the House Ways and Means Committee bill:
- No proposed changes to (or elimination of) the step-up basis rules for decedent's estates
- No proposed changes to the estate, gift, and generation-skipping transfer tax rates
- No proposed changes to the state and local tax (SALT) provisions
- No proposed provisions relating to Section 1031 real estate exchanges
Takeaway
None of these items are law yet. These proposals are subject to amendment and passage by the House and the Senate and signature by the President. However, because the window for planning to address some of these potential changes may be closing, please contact us as soon as possible to discuss your situation.