by Alisa Kim O’Neil, JD, CTFA, AEP®, CDFA®, Co-Chief Planning Officer
The House Ways and Means Committee published their 645-page tax increase proposal on Monday, September 13, 2021. The proposal centers around increases in corporate taxes, capital gains taxes, and individual income taxes for high-income households to pay for new spending program.
The House proposals are lower than the rates proposed by the White House earlier this year, but still retain significant increases for high-income individuals and corporations. The highlights on the increases are as follow:
Capital Gains Top Rate for high income households to increase by 5%*:
*This increase is to take effect as of September 13, 2021. There are exceptions for transactions that began prior to September 13th but have not concluded by that date.
Income Tax Top Rate (for taxpayers exceeding $400,000 income) is raised by 2.6%. This would also include a 3% surtax on income above $5,000,000.
Two changes that were not made to income tax are:
- There was no change to the SALT (state and local tax) deductions, which remain $10,000
- They did not include a capital gains tax on unrealized gains upon an individual’s death. Therefore, a decedent’s unrealized gains will continue to receive a “step-up” in tax cost basis at his/her date of death to eliminate/minimize capital gains taxes owed at death.
Corporate Tax Top Rates are increased by 5.5% for those corporations that have income over $5,000,000. The House proposal includes a tiered system of taxing corporations. The current rate is a flat 21% tax rate.
Federal Estate Tax Changes
The Tax Cuts and Jobs Act of 2017 doubled the federal estate tax exemption beginning on January 1, 2018, and is set to sunset on December 31, 2025. The House Proposal accelerates the expiration to the end of this year.
Current Federal Estate Tax Exemption: $11,700,000
Federal Estate Tax Exemption post sunset: $5,500,000 (adjusted for inflation)
Changes to IRA Contributions/RMDs and Roth IRA Conversions – highlights to these updates are as follows:
- The proposal limits an individual from contributing to an IRA if the taxpayer meets both of the two conditions:
- IRA balance exceeds $10,000,000 on December 31st of the prior tax year; and
- Taxpayer has income in excess of $400,000 (single) or $450,000 (married filing jointly).
- The proposal requires an individual in RMD status (currently age 72 or older) to take the taxpayer’s calculated RMD amount plus 50% of the balance above $10,000,000. There are also proposed distribution requirements for Roth IRAs in excess of $20,000,000.
- Roth conversions for IRAs and employer-sponsored plans will not be available for a taxpayer with income over $400,000 (single), $450,000 (married filing jointly) and $425,000 for head of households). The effective date will not be until January 1, 2032.
- The proposal prohibits an IRA from holding any investments that are not registered under the federal securities laws. Therefore, those investments offered to accredited investors cannot be held in an IRA without losing IRA status.
The Democrats would need to have all of their party’s votes in order to secure the passage of this plan. There are some in the party who want to see some additional changes before they are ready to publicly support it. Therefore, these proposed tax changes are still preliminary. However, with the lower increases proposed by the White House earlier this year, many tax professionals and wealth managers can more effectively counsel their clients.
If you have any questions, please contact a member of our Estate and Financial Planning Group: