What Upcoming Tax Legislation Might Mean For You, Your Business, and Your Estate Plan
October 22, 2021
At a glance
- The main takeaway: House and Senate Democrats are debating and modifying President Joe Biden’s tax proposals with a view toward passing legislation as part of the budget reconciliation process. Each of the competing proposals contain tax increases, including rate changes, new or restored limitations on deductions and the likelihood of increased IRS enforcement.
- Impact on your business: Because of the political landscape, any tax legislation will have to be passed through reconciliation, which means the new legislation will not be passed until late October at the earliest. This gives taxpayers who may be impacted by the legislation a short period of time to take planning steps to minimize tax costs.
- Next steps: Aprio’s Tax team can help you plan around likely tax increases by providing models based on possible provisions in the prospective new tax law, and to provide guidance and tax planning tools to react quickly to changes in existing law.
To learn more about these potential impacts, schedule a free consultation today.
The full story:
House and Senate Democrats continue to hash out terms of a tax overhaul bill as part of President Biden’s legislative agenda. Due to the political landscape in Washington, D.C., any legislation that deals with taxes will have to be passed on a party-line basis through the budget reconciliation process, as was the case involving the previous major tax bills under Presidents Obama and Trump.
While the House Budget Committee recently approved legislative text for the Build Better Act, which provides a framework for the proposals that may be included in a final tax bill, negotiations between various factions of the Democratic Party almost certainly will result in significant changes to the initial legislative text. However, the text gives a glimpse into what almost certainly will be an increase in taxes for higher-income taxpayers, as well as certain other key changes that will impact businesses, individuals and even estates and trusts.
All the proposals being debated envision an increase in top marginal income tax rates for individuals and corporations, as well as a rollback of certain components of the Tax Cuts & Jobs Act (TCJA) of 2017. The legislative text, as well as other competing proposals coming out of both the House and the Senate Democratic caucuses, make numerous changes to the tax regimes for individuals and businesses. Some of the most noteworthy possibilities include provisions impacting individuals, estates and trusts/wealth transfer planning and businesses are listed below:
- President Biden’s campaign proposal, and the House bill text, calls for an increase in the top individual rate to the pre-TCJA rate of 39.6 percent, with a proposed lowering of the threshold at which the top rate applies.
- The tax plans also call for an increase in the top rate on long-term capital gains to 26.5 percent for individuals earning over $400,000 annually. If enacted, the increase scheduled to go into effect as of the date of passage that the bill goes into law, which would prevent taxpayers from selling assets at year-end to avoid higher capital gains rates.
- The proposals also extend the Net Investment Income Tax (NIIT) to types of income which are currently not subject to the surcharge. If enacted, the bill would subject all income from a trade or business to the 3.8 percent NIIT for taxpayers earning over $400,000 for single individuals or $500,000 for married taxpayers filing joint returns, unless the income is subject to self-employment tax. This includes income earned through S corporations.
- The House proposal subject non-corporate taxpayers with a modified adjusted gross income over $5 million dollars to a 3 percent surtax on the excess over the $5 million threshold.
Estate and Gift Tax
- The House plan proposes to restore the lifetime gift and estate tax exemption to the levels that existed prior to the TCJA of 2017. The TCJA increased the lifetime gift and estate tax exemption from $5 million to $10 million, indexed for inflation. The exemption was set to expire, or “sunset,” on December 31, 2025. Under the House proposal, the exemption will decrease from the 2021 exemption amount ($11.7 million) to an indexed amount of $5.85 million for all transfers occurring after December 31, 2021. This lower exemption amount will apply to generation-skipping tax transfers as well.
- The House bill proposes to restrict a key estate planning tool used by high-net worth taxpayers to shield their estate from taxes, changing the treatment of grantor trusts by requiring decedents to include many of those trusts in their gross estates. In addition to the estate tax inclusion, the House bill would also treat transfers made by the grantor/deemed owner of underlying trust assets to the trust as taxable exchanges for all trusts formed after the date of enactment.
- Corporate tax rates on the upper end of the income structure would increase, with the maximum rate for corporations moving up to 26.5 percent from the current top rate of 21 percent.
- The House bill would extend the holding period for “carried interest” from the current three years to five years to receive long-term capital gain treatment on the sale of underlying assets. This proposal falls short of the platform on which candidate Biden ran, which would have eliminated capital gains treatment of carried interest altogether.
- The House bill proposes to reduce the benefit available to certain non-corporate taxpayers holding “qualified small business stock” for more than five years. Under current rules, taxpayers may be able to exclude up to 100 percent of the gain on a sale of such stock. The House bill also reduces the gain exclusion on sale of “qualified small business stock (QSBS)” from its current full exclusion to a 50 percent exclusion on the sale of such stock, applicable to sales occurring on or after September 13, 2021. This provision would prevent taxpayers from selling off QSBS holdings before the lower exclusion rate applies, unless the sale arose from a binding contract entered on or before the September 13, 2021 cutoff date.
- The House bill would limit the 20 percent “Qualified Business Income” created by Section 199A to $400,000 for an individual taxpayer ($500,000 for joint filers and $250,000 for married individuals filing separately). This deduction is available to non-corporate taxpayers (individuals or other pass-through entities) on income earned through a pass-through entity on U.S. trade or business income.
The bottom line
- The provisions listed above are just some of the proposals contained in the House reconciliation bill. If enacted, these changes will have a significant impact on virtually every taxpayer in America, with many of the effects focused on high-income and high-net-worth individuals and business owners.
- The proposals discussed in this article cover only those provisions impacting resident taxpayers involved in U.S.-sourced activities. The House bill contains significant changes to U.S. taxation of cross-border activities. We will discuss the international changes proposed in the House bill in a separate article.
- While several of the rate increases and/or curtailing of deductions will not provide planning opportunities due to the cutoff date (if enacted), the impact of other potentially costly tax increases may be minimized through careful planning.
The best way to prepare yourself and your business for tax increases is to identify areas in which you may be most affected. That’s where Aprio can help. Our Tax team is up to speed and well-versed on the aspects of these proposals that are most relevant to our clients. We can help you prepare for future changes to achieve the best possible tax results.
Let Aprio help you prepare for future tax changes. Schedule a consultation today!
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.