Tax Changes Looming?

Everybody knows big tax changes are coming. Nobody knows specifically what those changes will be. If you’ve been paying attention to the news at all, you know there are a variety of ideas circulating in Washington that, if passed into law, would significantly impact estate and income taxes for individuals, families, and businesses.

Here we’ll take a look at three proposals currently garnering much of the attention. Senator Bernie Sanders (I-VT) introduced the For the 99.5% Act into Congress on March 21, 2021. On March 29, Senator Chris Van Hollen (D-MD) introduced the Sensible Taxation and Equity Promotion (STEP) Act. The Fiscal Year 2022 Budget represents the Biden Administration’s revenue proposals for the upcoming fiscal year and was detailed in the Treasury Green Book, released May 28, 2021. This is not proposed legislation. In order for any proposal included to become law, it will have to be introduced to and passed by Congress.

Some of the most talked-about changes in these proposals include higher marginal income tax rates, higher estate tax rates, higher corporate tax rates, the elimination of the step-up in cost basis at death, and lower estate and gift tax exclusion amounts. Most of these proposals would become effective for the 2022 tax year. Significant differences in the proposals’ effective dates are indicated below. Note that all effective dates are subject to change as the legislative process unfolds.

After reading this, you may be wondering, “Should I be making any changes to my investment portfolio or estate planning in advance of any tax law changes?” It is still early in the legislative process and it is difficult to predict what tax provisions the final bill will include when it is ultimately put up for vote. We usually caution against taking action based solely on anticipated changes to tax law. Instead, we advise you to consider the long-term implications of any planning you implement, now or in the future. History has demonstrated that tax law will shift with the political landscape. Be sure that the planning you put in place today aligns with your personal, family, and business objectives for the long term.

One final note to consider. Thinking about these myriad proposals had me wondering how the IRS could possibly keep up with all the changes. Clearly, I wasn’t alone. The Green Book proposes an increase in the budget for the IRS Enforcement and Operations Support accounts by $6.7 billion and to provide the IRS with $72.5 billion in mandatory funding, a portion of which would be used for IRS enforcement and compliance. The proposal would direct that these additional resources be used only for enforcement against taxpayers with income above $400,000.

Key points of each of the proposals mentioned above are detailed below. 

Indicates where changes have been proposed.

Income Tax

	For the 99.5% Act	STEP Act	The Green Book Proposal
Corporate Tax Rates	—	—
Individual Income Tax Rates	—	—
Capital Gains Tax Rates	—	—
1031 Like-Kind Exchange	—	—
Social Security Tax Cap	—	—	—
State and Local Tax (SALT) Limitation		—	—

Corporate Tax Rates

Current corporate tax rates are a flat 21%.

• For the 99.5% Act: No change proposed
• STEP Act: No change proposed
• The Green Book Proposal: Increase corporate tax rate to 28%.

Individual Income Tax Rates

The current top marginal rate is 37% on taxable income over $628,301 for married filing jointly.

• For the 99.5% Act: No change proposed
• STEP Act: No change proposed
• The Green Book Proposal: Increase the top marginal rate to 39.6% for taxable income over $509,300 for married filing jointly.

Capital Gains Tax Rates

Current top rate for long-term capital gains and qualified dividends is 20% for income over $469,050.

• For the 99.5% Act: No change proposed
• STEP Act: No change proposed
• The Green Book Proposal: Increase the long-term capital gains tax rate and qualified dividends tax rate to 39.6% for income over $1 million. This proposal would be retroactive for all gains and income recognized after April 28, 2021.

1031 Like-Kind Exchange

Currently, there is no limit on the amount of gain that can be deferred in a 1031 like-kind exchange.

• For the 99.5% Act: No change proposed
• STEP Act: No change proposed
• The Green Book Proposal: Limit the aggregate amount of gain deferral in a 1031 like-kind exchange in a year to $500,000 per person ($1 million for married couples who file jointly). Any excess gain would be recognized in the year of the exchange.

Social Security Tax Cap

Currently, the social security tax paid by employees (6.2%) and self-employed individuals (12.4%) is capped at the first $142,800 of wages (indexed for inflation).

• For the 99.5% Act: No change proposed
• STEP Act: No change proposed
• The Green Book Proposal: No change proposed. Some thought the Biden Administration would remove this cap, leaving all wages subject to the social security tax. However, this proposal was left out of the Green Book.

State and Local Tax (SALT) Limitation

The deduction of state and local income tax is currently limited to $10,000.

• For the 99.5% Act: Remove the limit on state and local income tax deductibility.
• STEP Act: No change proposed
• The Green Book Proposal: No change proposed.

Basis Step-up

Currently, all transfers on death receive a step-up in basis; no gain is realized upon transfer. Lifetime transfers do not receive a basis step-up; the basis carries over to the new owner; no gain is realized upon transfer.

	For the 99.5% Act	STEP Act	The Green Book Proposal
Gains on transfers on death to non-spouse individuals. No changes are proposed for transfers to spouses or gifts to charity.	—

For the 99.5% Act: The bill states that a step-up in basis is not available for assets held in a grantor trust unless the trust is includable in the grantor’s estate. This is already the practice and does not represent a change.

STEP Act: Treat transfers at death or by gift as a gain realization event. Any unrealized capital gains on the property transferred would be realized at the time of transfer as if the property were sold. Individuals would have a $1 million lifetime exclusion for gains on these transfers. Other exclusions for certain assets are included.

• Lifetime gifts to non-grantor trusts trigger a gain at the time of the gift. This would be retroactive to 1/1/2021.
• Gifts to grantor trusts not includable in the grantor’s estate would trigger a gain at the time of the gift/funding. This would be retroactive to 1/1/2021.
• Assets in non-grantor trusts would be deemed sold every 21 years (“marked to market”) triggering gains at that time.

The Green Book Proposal: Treat transfers at death or by gift as a gain realization event. Any unrealized capital gains on the property transferred would be realized at the time of transfer as if the property were sold. Individuals would have a $1 million lifetime exclusion for gains on these transfers. Other exclusions for certain assets are included.

• The proposal would tax transfers into, and in-kind distributions from, a trust, a partnership or other non-corporate entity.
• The proposal allows for a 15 year payment plan for the tax on appreciated assets transferred at death other than liquid assets.
• It also allows for the deferral on the tax payment for transfers of certain family-owned business interests until the interest is sold or the business ceases to be family-owned.

Wealth Transfer

	For the 99.5% Act	STEP Act	The Green Book Proposal
Estate and Gift Taxes			—
Valuation Discounts		—	—
Generation Skipping Trusts		—	—
Grantor Trusts		—	—
Grantor Retained Annuity Trusts (GRATs)		—	—

Estate and Gift Taxes

The current gift and estate exemption amount is $11,700,000 per individual (adjusted for inflation). The generation skipping transfer tax is also $11,700,000 (adjusted for inflation). The estate and gift tax rate is progressive with a top rate of 40% for taxable amounts over $1 million.

For the 99.5% Act:

• Estate and gift tax rate increases the top progressive tax rate to 45-65% based on the size of the transfer or estate.
• Estate and generation skipping transfer tax exemption reduced to $3,500,000 per person, adjusted for inflation.
• Lifetime gift exemption reduced to $1,000,000 This limit may not be inflation adjusted.
• Annual exclusion gifts to trusts would be limited to $30,000 per donor.

STEP Act:

• Income tax triggered at death will be deductible against the estate tax to limit double taxation. It is unclear how this is tracked for lifetime gifts (or if it is at all).
• Allows income tax (capital gains tax) triggered at death to be paid over 15 years (but not lifetime gifts).

The Green Book Proposal: No change proposed.

Valuation Discounts

Currently, non-active entities (for example, family limited partnerships) can often receive valuation discounts for lack of marketability and control.

For the 99.5% Act:

• No minority/lack of control discounts for non-active entities;
• Active businesses will be valued the same except non-essential assets will be valued separately without discounting.

STEP Act: No change proposed.

The Green Book Proposal: No change proposed.

Generation Skipping Trusts

Generation skipping transfer is currently unlimited in trusts where the exemption is applied.

For the 99.5% Act:

• The generation skipping transfer exemption will be limited to only 50 years after the creation of the trust. This would also affect existing trusts.
• After 50 years, the GST-exempt trust would become non-exempt and subject to GST tax on transfers to skip persons.

STEP Act: No change proposed.

The Green Book Proposal: No change proposed.

Grantor Trusts

Currently, certain grantor trusts can be excluded from the grantor’s estate. Transfers to the trust are generally not taxable.

For the 99.5% Act:

• Grantor trusts are includable in the grantor’s estate.
• Distributions from a grantor trust during the grantor’s lifetime are taxable gifts.
• Existing grantor trusts are not excluded from this proposal.

STEP Act: No change proposed.

The Green Book Proposal: No change proposed.

Grantor Retained Annuity Trusts (GRATs)

There is currently no minimum term on GRATs. The actuarial remainder value of the GRAT can be zero at funding.

For the 99.5% Act:

• A 10-year-minimum term would be imposed for GRATs, but the trust cannot last longer than the grantor’s life expectancy plus 10 years.
• The value of the remainder interest must be at least 25% of the value contributed (no more “zeroed out GRATs”).
• A violation of any of these rules makes the entire GRAT taxable, not just a revision to the original calculation.

STEP Act: No change proposed.

The Green Book Proposal: No change proposed.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.