The House Democrats, through the Ways and Means Committee, recently released a new proposal for significant tax increases. The proposal is designed to be incorporated in the Democrat’s budget reconciliation bill known as the “Build America Back Better Act.”

The Committee is negotiating the proposal and it will likely be passed by a majority vote in the House. If passed by the Senate, tax rates for both individuals and corporations would increase. Because the proposal includes major revisions to the estate tax, capital gains taxes, and the way retirement accounts are taxed, and because the effective dates are as early as the date of passage and December 31, 2021, it is important to plan now to achieve your best tax results.   We believe the key changes to consider are as follows:

1. Estate and Gift Tax: As of now, any individual can give away up to $11.7 million during their lifetime or at their death without that money being taxed. The proposal would revert this credit against estate and gift taxes to about half of the current exemption: $6,020,000 per individual. Effective January 1, 2022.
2. Individual Income Tax: The top marginal individual income tax rate would increase to 39.6% (from 37%). This increased rate would apply to 1) married individuals filing jointly with taxable income over $450,000; 2) heads of households with taxable income over $425,000; 3) unmarried individuals with taxable income over $400,000; 4) married individuals filing separate returns with taxable income over $225,000; and 5) estates and trusts with taxable income over $12,500. Effective December 31, 2021.
3. Capital Gains Tax: The proposal would increase the 20% tax rate on capital gains to 25%. This increase would potentially be effective as of the date the proposal was introduced (September 13, 2021). A “transition rule” may provide that the current rate of 20% would continue to apply to gains and losses for the portion of the tax year prior September 13, 2021.
4. Retirement Contributions: Taxpayers can currently make contributions regardless of income level. The proposal would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions would apply to 1) single taxpayers with taxable income over $400,000, 2) married taxpayers filing jointly with taxable income over $450,000, and 3) heads of households with taxable income over $425,000. Effective December 31, 2021.
5. Lifetime Gifting Restrictions: There are significant changes that would cause Grantor Trusts such as Intentionally Defective Irrevocable Trusts (IDIT) and Life Insurance Trusts to be taxed in the Grantor’s estate for estate tax purposes. In other words, Grantor Trusts would no longer be excluded from estate tax if the decedent is the deemed owner of the trust. This is a complete reversal of prior tax law. Likewise, the proposal would modify and even eliminate valuation discounts for estate and gift taxation of intra-family transfers involving passive assets. This means prefunding an existing Grantor Trust, amortizing and accelerating a sale to an existing Grantor Trust, or making any planned gift using gifts into LLCs before the donors are denied the use of valuation discounts may all be important steps to consider at this time. Effective date will most likely be the date of enactment.

Time is of the essence to discuss ways to limit your exposure to these changes. There are a number of options to consider, and we are ready to assist you to prepare for what appears a likely possibility that many of the above outlined changes will become law. Please contact your Kemp Klein attorney or Brian R. Jenney, or Cynthia L. Umphrey to discuss.