Last week the House Ways and Means Committee released a draft of Biden’s proposed tax legislation. Acumen’s team is diligently staying focused as changes occur to advise our clients. None of these changes have yet to become law, but we anticipate major changes on the horizon. We would like to share a few key highlights from the potential legislation:
- The top individual income tax bracket would be increased to 39.6%, creating a combined top tax rate of 46.4% (39.6% top individual tax bracket, plus 3.8% net investment income tax, plus 3% surtax).
- A new 3% surtax on individuals with modified adjusted gross income in excess of $5,000,000 ($2,500,000 for married taxpayers filing separately). The 3% surtax would be assessed for trusts and estates with income in excess of $100,000.
- The top capital gains rate would be increased to 25%, creating an effective rate of 31.8% (25% capital gains rate, plus 3.8% net investment income tax, plus 3% surtax). The proposed legislative text currently provides for any transactions completed on or before September 13, 2021, or subject to a binding written contract before September 13, 2021 (even if the transaction closes in the current tax year after September 13), are subject to the current 20% statutory rate. Capital gains recognized after the current tax year, regardless of the contract date, are proposed to be subject to the new 25% statutory rate.
- Wash sale rules would now affect cryptocurrency and other digital assets. Historically, cryptocurrency has not been subject to wash sale rules that apply to stock sales.
- Further contributions to Roth or traditional IRAs would be prohibited if the total value exceeds $10,000,000 as of the end of the prior taxable year.
- New required minimum distributions would be required on high income taxpayers with high account balances similar to the contribution limits for accounts exceeding $10,000,000.
- Eliminates backdoor Roth IRA strategies for taxpayers with income above $450,000 (married filing jointly). The bill also prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level.
- Roth conversions are eliminated for earners over the $450,000 (married filing jointly), but not effective until 2031.
- IRA investments requiring accredited investor status would be disallowed with a two-year transition period for IRAs already holding these investments.
- Section 199A Qualified Business Income Deduction would be limited once certain income thresholds are met. (The thresholds are $500,000 married filing jointly, $400,000 single and head of household, $250,000 married filing separately, and $10,000 trusts and estates.)
- The current corporate income tax rate of 21% would be replaced with a graduated rate structure of 18% on taxable income up to $400,000, 21% on taxable income between $400,000 and $5,000,000, and 26.5% on taxable income above $5,000,000. Incorporated businesses, such as law firms, accounting firms, and medical practices taxed as personal service corporations, would be subject to a flat corporate income tax rate of 26.5%.
- S-Corporation distributions to be subject to the 3.8% net investment income tax for taxpayers with income higher than $400,000 for individual filers or $500,000 for married filing jointly.
- The estate and gift tax lifetime exemption would be cut in half from the current inflation-adjusted $10,000,000 per person ($11,700,000 in 2021) to an inflation-adjusted $5,000,000 ($5,850,000 based on the 2021 inflation rate). This reduction would apply to estates of decedents dying and gifts made after December 31, 2021.
- Grantor trusts created after the enactment of the legislation would now be included in the estate of the grantor. All distributions from grantor trusts created after the enactment of the legislation would be deemed as gifts to the beneficiaries.
- The legislation also looks to end a commonly used estate reduction technique of selling an asset to a defective grantor trust by taxing such sales the same way as the normal sale of assets to a third party. This provision applies only to trusts executed after the enactment of the legislation and subsequent transfers to grantor trusts.
The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, would fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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