On the campaign trail and now in office, President Biden has promised to enact new tax legislation aimed at making sure wealthy Americans “pay their fair share.” To that end, a number of legislative proposals are currently working their way through the House Ways and Means Committee. Those proposals contain many changes that could have serious repercussions for high-net-worth individuals and their families. To help you plan effectively and make the most informed decisions, here is a look at 10 current legislative proposals that could potentially impact affluent individuals and families.
Impact of Proposed 2021 Tax Legislation
1. Termination of temporary increase in unified credit (Section 138207)
A new proposal would eliminate the temporary increase in the unified credit against estate and gift taxes. The credit would be reverted to its 2010 level of $5,000,000 for individuals, indexed for inflation.
2. Top individual tax rate increases to 39.6% (Section 138201)
The new marginal rate would apply to married individuals filing jointly with taxable income over $450,000, to unmarried individuals with taxable income over $400,000, and to heads of households with taxable income over $425,000. The current version of the bill would make the change applicable to all taxable years beginning after Dec. 31, 2021.
3. Top capital gains rate increases to 25% (Section 138202)
The top capital gains rate would increase to 25%, up from the current 20%. The proposed rule would apply for taxable years ending after the date the legislation is enacted. However, a transition rule stipulates that the preexisting statutory rate of 20% will continue to apply for the portion of the taxable year prior to the date the law is enacted.
4. Net investment income tax to trade or business income (Section 138203)
A proposed change to section 1411 would expand the net investment income tax to cover net investment income generated in the normal course of business or trade for taxpayers with taxable income that exceeds $400,000 for a single filer, and $500,000 for a joint filer. However, the tax does not apply to wages on which FICA is already imposed. This rule would apply to taxable years starting after Dec. 31, 2021.
5. Limitation of the 199A deduction (Section 138204)
A proposed change to section 199A would set the maximum allowable deduction at $500,000 for a joint return, $400,000 for an individual, and $250,000 for a married individual filing separately. The proposed rule would apply to taxable years beginning after Dec. 31, 2021.
Click here to read the full text of the proposed tax law from the Ways and Means Committee website.
6. Surcharge on high income individuals, trusts, and estates (Section 138206)
A new provision would add a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000, or $2,500,000 for a married individual filing separately. In this case, modified adjusted gross income is considered your adjusted gross income after being reduced by any deduction allowed for investment interest (as defined in section 163(d)). This proposal would also apply to taxable years beginning after Dec. 31, 2021.
7. Increase in limitation of estate tax valuation reduction for certain real property (Section 138208)
In a positive change for affluent families, a proposal seeks to amend section 2032A to increase the special valuation reduction for qualified real property used in a family farm or family business. Under the new rule, decedents who own real property used in a farm or business will be allowed to value that property for estate tax purposes based on the actual use-value, not the fair market value. The proposal would increase the allowable reduction from $750,000 to $11,700,000.
8. Tax rules applicable to grantor trusts (Section 138209)
A new provision would pull grantor trusts into a decedent’s taxable estate if the decedent is deemed the owner of the trusts. Currently, grantors can remove assets from their estate by putting them into a trust while still closely controlling that trust. This new rule would essentially prevent individuals from creating trusts outside their estate while still being able to control them. The new rule would also treat sales of assets between grantor trusts and their deemed owner the same as sales between the owner and a third party. The good news for those who have already established trusts is that the new rule would only apply to future trusts and transfers.
9. Nonbusiness assets valuation rules (Section 138210)
Under a new proposal, when an individual transfers nonbusiness assets, those assets will no longer be allowed a valuation discount for transfer tax purposes. In this context, a nonbusiness asset is a passive asset that is held to produce income and is not used in active conduct of a trade or business. When a passive asset consists of 10% interest in another entity, the rule applies and treats the holder as holding its ratable share of the assets of that other entity directly. The new rule would only apply to transfers that take place after the date the legislation is enacted.
10. Tax treatment of rollovers to Roth IRAs and accounts (Section 138311)
The proposed legislation would eliminate so-called “back-door” Roth IRA strategies by eliminating Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, and $450,000 for married taxpayers filing jointly. The bill also adds a new annual reporting requirement for employer-defined contribution plans with aggregate account balances that exceed $2.5 million. The provisions of this section would be effective for tax years beginning after Dec. 31, 2031.
Stay up to date for effective planning
At Granite Harbor Advisors, we strive to be a resource and educate our clients on the issues that could impact their financial health, so they can make the right decisions for themselves and their families. If you are interested in learning more about how proposed tax changes could affect your portfolio and discuss your options for responding, contact us today and we’ll set up a call.