A few days ago, the House Ways and Means Committee released its tax provision proposals. Those proposals cover income, gift, and estate taxes. Make no mistake the Democratically controlled House and Senate have the votes to pass the tax proposals. Although we do not know what the final House and Senate bills will actually contain, below are some of the Ways and Means proposals that will be debated under a reconciliation bill (subject to a simple majority to pass). Although the bill is in draft we are likely to see some of the below proposals enacted in some form or fashion. However, there may be many changes. We will continue to update you as information becomes available. The following are a list of the most significant proposed changes for our clients in the areas of estates and trusts, individuals, and corporations:
The Bad News:
1. For estates and trusts:
- Section 138207 proposes a reduction in the estate and gift tax exemption equivalents from the current $11.7 million to one half that amount ($5.5 million adjusted for inflation), effective after December 31, 2021. This means that amounts transferred in excess of those amounts will be subject to a gift or estate tax.
- Section 138209 proposes changes to certain tax rules related to Grantor trusts. Grantor trusts, like many irrevocable life insurance trusts, GRATs, CLATs, grantor SLATs and a variety of additional common place planning techniques will be subject to inclusion in the grantor’s (read donor’s) estate. Grantor trusts established on or prior to the date of enactment of the Act are grandfathered, but contributions to and Grantor trusts created and funded after the date of enactment will cause some degree of inclusion. Details to be ironed out.
- Under Section 138201 the proposal is that for estates and trusts with taxable income over $12,500 the top marginal individual income tax rate will be raised to 39.6%. Such increase would apply to tax years beginning after December 31, 2021.
- Under Section 138203, it has been proposed for estates and trusts with more than $400,000 in taxable income to expand the net investment income tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business. Meaning all earnings, both passive and non-passive, from pass-through entities would be subject to the 3.8% self-employment Medicare tax or the 3.8% NIIT. Such proposal would be effective for tax years beginning after December 31, 2021.
- Under Section 138204, it has been proposed to amend the provisions of 199A to set the maximum allowable qualified business income deduction at $10,000 for estates and trusts. Such change would apply to tax years beginning after December 31, 2021.
2. For individuals:
- Under Section 138201, married individuals with taxable income over $450,000 ($225,000 for individuals) it has been proposed to increase the top marginal individual income tax rate to 39.6%. Such increase would apply to tax years beginning after December 31, 2021.
- Under Sec. 138202, it has been proposed to increase the capital gains rate for certain high-income individuals to 25%. This increase would apply to taxable years ending after the date of introduction of the Act, meaning that it could go into effect as of September 13, 2021. Thus, any capitals gains recognized after September 13, 2021 may be subject to the higher 25% rate.
- Under Section 138203, it has been proposed for individuals with more than $400,000 ($500,000 for joint filers) in taxable income to expand the net investment income tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business. Meaning all earnings, both passive and non-passive, from pass-through entities would be subject to the 3.8% self-employment Medicare tax or the 3.8% NIIT. Such proposal would be effective for tax years beginning after December 31, 2021.
- Under Section 138204, it has been proposed to amend the provisions of 199A to set the maximum allowable qualified business income deduction at $500,000 for joint filers ($400,000 for individuals). Such change would apply to tax years beginning after December 31, 2021.
- Section 138206 proposes a surcharge on high income individuals, trusts, and estates by imposing a 3% tax on a single taxpayer’s modified AGI that exceeds $5,000,000 ($2,500,000 for married individuals filing separately). Such tax would be effective for tax years beginning after December 31, 2021.
- Section 138210 proposes to change valuation rules for certain transfers of non-business assets. The proposed change would impact transfers of non-business assets (presumably between family members) by not allowing a valuation discount for transfer (gift) tax purposes. This change would apply to taxable years ending after the date of introduction of the Act, meaning that it could go into effect as of September 13, 2021. Thus, any transfer of non-business assets after September 13, 2021 may not be afforded a valuation discount.
- Section 138301 proposes to limit high-income taxpayers’ contributions to both roth IRAs and traditional IRAs. It has been proposed that a single taxpayer with taxable income over $400,000 and an IRA that exceeds $10,000,000 in value as of the end of the prior taxable year will be prohibited from making further contributions to such IRA for the taxable year. Such prohibition would be effective for tax years beginning after December 31, 2021.
- Section 138302 proposes minimum required distributions for an individual whose income exceeds $400,000 and whose combined traditional IRA, Roth IRA, and defined contribution retirement account balances exceed $10,000,000 at the end of a taxable year. The minimum distribution would be required the following year in the amount of 50% of the balance that exceeds $10,000,000 of the individual’s traditional IRA, Roth IRA, and defined contribution accounts. More stringent required distribution rules would apply to traditional IRAs, Roth IRAs, and defined contribution plans with combined balances that exceed $20,000,000. Such requirement would be effective for tax years beginning after December 31, 2021.
- Section 138311 proposes to eliminate the “back-door” Roth IRA scheme for individual taxpayers with a taxable income over $400,000. Such termination would be effective for IRA distributions, transfers, and contributions made after December 31, 2031.
- Section 138312 proposes to prohibit IRAs from holding securities that require accredited investor status, and any IRAs holding such securities would lose their IRA status. Such prohibition would be effective for tax years beginning after December 31, 2021, with a two (2) year transition period.
- Section 138314 proposes to prevent self-dealing by prohibiting the investment of IRA assets in entities in which the IRA owner has a 50% or greater interest in. Such prohibition would be effective for tax years beginning after December 31, 2021, with a two (2) year transition period.
- Section 138403 proposes to deny charitable deductions made by partnerships and other pass-through entities for contributions of conservation easements that exceed 2.5 times the sum of each partner’s adjusted basis in the partnership that relates to the donated property. This proposal applies to contributions made after December 31, 2016, the date of the relevant IRS Notice. Defective deeds may be corrected for returns after December 31, 2016 if the Section 6501 period has not expired as of such date.
3. For corporations:
- Section 13801 proposes to replace the flat corporate income tax rate with a graduated tax rate structure and to increase the corporate tax rate. The graduated rate structure proposes a rate of 18% on the first $400,000 of income, 21% on income up to $5,000,000, and a rate of 26.5% for any income that exceeds $5,000,000.
- Under Section 138149 the three (3) year holding period for long-term capital gain treatment is proposed to increase to five (5) years for individuals and businesses with an AGI that exceeds $400,000. Such increase would be effective for tax years beginning after December 31, 2021.
- Under Section 138150 taxpayers with an AGI equal to or in excess of $400,000 will be precluded from the special 75% and 100% exclusion rates for gains realized from certain qualified small business stock. Such limitation will apply to sales and exchanges after September 13, 2021.
That was a lot of bad news; now for the good news:
- The Van Hollen plan to eliminate the step up in basis at death is not included in the bill.
- Under Section 138149 the three (3) year holding period for long-term capital gain treatment under Section 1061 will still apply for real property transfers.
- Under Section 138150 the baseline 50% exclusion will remain available for all taxpayers under Section 1202.
- Biden’s proposal to increase the corporate tax rate to 28% is not included in the bill.
- Biden’s proposal to increase the top capital gains rate to 43.4% for individuals with an AGI in excess of $1,000,000 is not included in the bill.
- Biden’s proposal to lower the estate and gift tax exemption to $1,000,000 is not included in the bill.
- Changes to estate and gift tax rates are not included in the bill.
*Note: This is just the House bill, we do not know what’s going to happen with the Senate, and this is still subject to a vote.
Additional details on Subtitle I – Responsibly Funding Our Priorities can be found here: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf