Thursday, August 26, 2021
Since President Biden took office earlier this year, there has been a lot of buzz and speculation about what tax policy would be like under the Biden-Harris administration. Given the Treasury’s recently published general explanation of the administration’s proposed revenue for fiscal year 2022, commonly known as the ‘Green Paper’, we now have a better idea of the proposed tax law changes that the administration will focus on in the coming year.
Interestingly, while the Green Paper contains various tax proposals that could have a significant impact on estate planning, it does not include a proposal to reduce the inheritance and gift tax exemption, which was a major topic of discussion during the election cycle last year (click here to see ours Advice to read on estate planning and the 2020 election). Still, some Democrats in Congress continue to advocate this reduction. For example, Senator Bernie Sanders’ bill for the 99.5% bill would reduce the gift tax exemption to $ 1 million per person and the inheritance tax exemption to $ 3.5 million per person, as well as introducing new progressive inheritance tax rates of 45%. to 65%.
In any case, the Green Paper contains the proposed tax laws, which reflect the top management priorities and are more likely to be implemented than the proposals not in the Green Paper. The Green Paper’s proposals aim to reverse many of the tax laws contained in the 2017 Tax Cuts and Jobs Act passed under former President Trump, such as a proposed increase in individual income tax rates and an end to certain capital gains tax preferences, discussed below are detailed below.
Green Book Suggestions That Would Affect High Net Worth Clients:
Raise the upper marginal income tax rate for the high-income. For taxable income in excess of the ceiling, the upper marginal income tax rate would be increased from 37% to 39.6%. For tax years beginning January 1, 2022, this will apply to income greater than $ 509,300 for married individuals filing together and $ 452,700 for single parents and will be inflation-indexed thereafter.
Taxation of capital gains for high earners at ordinary income tax rates. For taxpayers with adjusted gross income greater than $ 1 million, tax rates on long-term capital gains and qualified dividends would increase to meet proposed ordinary income tax rates. To the extent that a taxpayer’s income exceeds $ 1 million, the tax rate would go from 20% (or 23.8% including Net Investment Income Tax (“NIIT”)) to 39.6% (or 43.4% inclusive NIIT) rise. This proposal currently includes a retroactive date of April 28, 2021.
Treat transfers of esteemed property by gift or death as liquidation events. This proposal would eliminate the so-called “step-up-in-basis gap”, which enables an asset transferred in the event of death to be “upgraded” to fair market value for cost reasons, which means that no capital gains tax is levied on the appreciation of the Asset is levied by the date of death. Instead, the gift or death transfer of an estimated asset would be treated as sold at fair market value at the time of transfer, creating a taxable gain-realizing event for the donor or deceased owner. However, there would be an exemption of $ 1 million per person (or $ 2 million per couple) from recognizing capital gains on assets transferred by gift or death that are inflation-indexed. In addition, certain exclusions would apply, including:
Residence. $ 250,000 per person (or $ 500,000 per couple) would be excluded from capital gains on the sale or transfer of a residence.
Surviving spouse. Transfers of a testator to a U.S. citizen spouse would transfer the testator’s estate and recognition of capital gains would be postponed until the surviving spouse dies or otherwise has the asset.
Charity. Estimated assets transferred to charity would not generate taxable profit; However, the transfer of valued assets to a shared interest charitable trust would generate a taxable gain in relation to the portion of the transferred value attributable to a non-profit beneficiary.
Although tax on profits deemed realized upon death would be deductible on the inheritance tax return of the deceased’s estate, deductions are not the same as tax credits, and in high-tax countries such as New York the additional tax can be substantial.
Imposing profit recognition on property transferred to or distributed by an irrevocable trust. Any transfer of property to an irrevocable trust and distributions in kind from an irrevocable trust would be treated as capital gains taxable recognition events. In addition, while the tax exempt status of a Generation Skipping Transfer (“GST”) trust would not be affected, the profit would be automatically recognized on assets held in an irrevocable trust that was otherwise within 90 years ago. The first possible recognition event would be December 31, 2030 for all trusts in existence on January 1, 1940. This proposal would also apply to transfers to and distributions in kind by partnerships and other partnerships. Abolition of valuation discounts. The valuation of partial holdings in real estate that is brought into a trust would correspond to the proportional share of the market value of all such real estate. In other words, when valuing transfers of partial interests in LLCs, corporations, partnerships, or real estate, no markdowns for poor marketability or minority interests would be allowed.
The legislative text of the government’s tax proposals is not expected to be available until autumn. It’s important to note that any proposed tax law changes are facing a 50-50 Senate, meaning the prospect of tax reform being passed is uncertain. Commentators expect the Green Paper proposals to be the subject of extensive negotiations over the next few months, including substantial opposition to large increases in capital gains tax rates. In the meantime, we’ve got from Wiggin and Dana [link to PCS attorneys page] are available to discuss the Green Paper’s proposals in more detail and to make proactive, tailor-made recommendations in light of the currently changing tax landscape.
Charles C. Kingsley, Leonard Leader, Vanessa L. Maczko, Rani Newman Mathura, Carolyn A. Reers,
Matthew E. Smith, Mary Margaret Colleary, Mi-Hae Kim, Erin D. Nicholls, Marissa A O’Loughlin,
Kaitlyn A. Pacelli and Beth A. Scharpf contributed to this article.