Is There Shelter to be Found?
As most are aware, there are significant tax changes on the horizon that will materially impact personal and business planning. In this post, we outline some of the salient build-up and points of emphasis as the Biden Plan continues to be negotiated.
Legislative Line-Up 2021
New legislation introduced by Democrats this year proposes significant changes to the tax treatment for wealthy households and multinational corporations.
President Biden proposed a tax plan – the Biden Plan – during his campaign that will raise tax revenue by $281 billion over the next decade and will affect all corporate and personal taxpayers at some level.
Sen. Bernie Sanders (I-VT) (along with Sens Gillibrand (D-NY), Whitehouse (D-RI), Van Hollen (D-MD), and Reed (D-RI)) recently introduced his tax plans – The “For the 99.5% Act” and the “Corporate Tax Dodging Prevention Act” – that will raise $430 billion over the next 10 years and will only affect the top .05% of American taxpayers and corporate taxpayers and will address the “rigged tax code”.
Sen. John Thune (R-SD) and John Kennedy (R-LA) introduced legislation – the “Death Tax Repeal Act of 2021” – to permanently repeal the estate tax.
Sen. Chris Van Hollen introduced the Sensible Taxation and Equity Promotion (STEP) Act, which repeals, as of January 1, 2021, a stepped-up basis of assets transferred at death by treating gifts and bequests other than between spouses and certain charities as realization events for recognizing capital gains – at death $1 million will be excluded from the capital gains tax and an aggregate of $100,000 in gains will be excluded for lifetime gifts. Rep. Bill Pascrell, Jr. introduced a similar bill in the House of Representatives but effective after December 21, 2021.
Proposed Biden/Sanders Tax Changes Affecting Business Owners
- Increase tax rates for qualified dividends and long-term capital gains (LTCGs) for taxpayers with incomes over $1 million from 15-20% today to almost 43.4%.
- Increase the top rate for individuals on ordinary income from 37% to 39.6% for incomes over $400,000.
- Expand the Social Security (FICA) tax & self-employment tax to 12.4% for earnings above $400,000.
- Increase the corporate income tax rate from 21% to 28% and as high as 35%.
- Decrease the current unified (gift, estate and generation-skipping transfer) tax exemption from $11.7 million per person (today) to $3.5 million per person and increase the gift and estate tax rate from 40% today to at least 45%. (Sanders proposes a graduated estate tax schedule up to 65%.)
- Eliminate the step-up in tax basis at death so that basis is carried over to the recipient.
- Bring back proposed restrictions on valuation discounts (Family Limited Partnerships and Family LLC’s).
Will the Proposed Tax Changes be Made Retroactive to 2021?
- Typically, tax legislation is prospective, e.g. January 1, 2022 if the tax plan is passed in 2021.
- Congress can enact retroactive tax legislation, eliminating the ability to “front-run” and implement many of the planning techniques employed in 2021. A tax law can apply retroactively if it is “rationally related to a legitimate legislative purpose”. (United States v. Carlton, 512 U.S. 26 )
- The general view is that the political forces at bay likely will not be supportive of a retroactive law (i.e. January 1, 2021) given the Democratic control of the Senate by the slimmest of margins, but it is impossible to foresee how legislative negotiations will play out.
- The Republicans announced May 25th that they are negotiating a counteroffer to Biden’s infrastructure tax plan that will retain former President Trump’s corporate tax rates for 2021. Subsequently, a joint House and Senate bi-partisan task force agreed to a compromised infrastructure bill. (That bi-partisan proposal has been, so far at least, rejected by President Biden and Speaker Pelosi.)
Many of these proposals outlined above are intended to virtually eliminate many time-tested estate tax reduction techniques such as SLATs (See our May Journal), GRATs, CLTs, Installment sales to IDGITs, and beneficiary’s trusts. There are income tax strategies that you may also want to consider before year end, e.g., accelerating capital gains on business sales and real estate, income shifting, changing deferral strategies, Roth IRA conversions.
Fortunately, there is still time to plan. Let us know if you would like to learn more about how these strategies may help reduce your potential estate taxes.
Principal & Co-Founder