On Sunday, September 12, 2021, the House Ways & Means Committee (the “Committee”) released draft legislation as part of Congress’ ongoing $3.5 trillion budget reconciliation process. The legislation, as approved by the Committee on Wednesday, September 15, includes significant tax proposals that, if passed, will dramatically change the tax and estate planning landscape for high-income and high-net worth individuals.
2021 tax planning will be particularly important this year, including revisiting your estate plan and developing defensive strategies. Below is an overview of the tax proposals that are particularly relevant for tax planning purposes:
Individuals
- The top marginal income tax rate would increase from 37% to 39.6% for married individuals filing joint returns with taxable income over $450,000; single taxpayers with taxable income over $400,000; and, married individuals filing separate returns with over $225,000. (This increase would also apply to trusts and estates with taxable income over $12,500.)
- The top capital gains tax rate for those same high-income taxpayers would increase from 20% to 25%for all sales and transactions closing after September 13, 2021.
- A new 3% surtax on modified adjusted gross income over $5 million for single individuals, heads of household, married couples filing jointly, and surviving spouses. The surtax would kick in at $2.5 million for married couples filing separately.
- A $10 million limit would apply to Individual Retirement Accounts (IRAs) contributions—allowing for no further contributions for married couples with taxable income over $450,000 or singles with taxable income over $400,000. The $10 million threshold would also accelerate required minimum distributions for those accounts.
- The proposal would also disallow the so-called “back-door” Roth IRAs by eliminating conversions for IRAs and 401(k) plans for single filers making over $400,000, head of household filers above $425,000, and for joint filers reporting more than $450,000.
- Wash sale rules modified to include commodities, currencies, and digital assets.
- The deduction for qualified business income would be amended by setting a cap on allowable deductions at $500,000 for individuals filing a joint return; $250,000 for a married individual filing a separate return; and, $10,000 for a trust or estate.
- The temporary expansion of the child tax credit—and advanced payments—would be extended through 2025. Additionally, changes to the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit (CDCTC) would become permanent.
Estate and Gift Tax Provisions
- The federal estate tax exclusion amount would be reduced to $6,020,000 in 2022 from $11,700,000 in 2021.
- Valuation discounts for transfers of non-business assets would be eliminated.
- Two key estate planning techniques would be significantly altered: Grantor trusts would be included in the grantor’s estate, and distributions from grantor trusts would be treated as taxable gifts. And, sales to intentionally defective grantor trusts (IDGTs) would be eliminated.
Businesses
- Top corporate tax rate would increase to 26.5% from 21% for corporate income above $5 million.(The 2017 law cut the rate for large corporations from 35% to 21%.) The tax rate drops to 18% for small businesses with income less than $400,000 and would remain 21% for all other businesses.
- Section 199A pass-through deduction would be capped at $400,000 for single filers, $500,000 for joint filers, $250,000 for married couples filing separately, and $10,000 for a trust or estate.
- 3.8% Net Investment Income Tax, or NIIT, would apply to net investment income derived in the ordinary course of a trade or business for single taxpayers making more than $400,000 in taxable income and $500,000 for married couples filing jointly. It’s worth noting that the NIIT does not apply to wages already covered by FICA.
- Deduction for Global Intangible Low-Taxed Income, or GILTI, would be reduced, essentially resulting in a tax rate of 16.5625%—it would also require a country-by-country method for calculating GILTI. Additionally, the proposal would reduce the deduction for foreign-derived intangible income, or FDII, to 20.7%.
- Eligible S corporations—those organized on May 13, 1996, before the current-law check-the-box regulations—would be allowed to reorganize as partnerships without triggering a tax.
- Permanently disallows excess business losses—net business deductions in excess of business income—for non corporate taxpayers.
In addition to these provisions, there are proposals on funding the IRS, on international income taxation and more. Several of the tax proposals outlined above would be effective upon the date of enactment.
Questions?
While it is impossible to accurately predict when, or what version of, the bill may ultimately become law, taxpayers should promptly seek guidance in determining how to proceed in this uncertain environment – particularly in the area of estate and gift planning.
Please contact us with your questions at 847-267-9600; info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. This information is updated regularly.