1. Increase in the top tax rate to 39.6%.
Not only does the top tax bracket go from 37% back up to 39.6%, but the amount of income necessary to hit that rate goes down to $400,000 for individuals and $450,000 for married joint filers. Because of this, some income that was taxed at 35% goes to the top bracket too. For income below these amounts there is no proposed change to the tax rates.
2. Reduction in the estate tax exclusion amount.
The bill would reduce the basic exclusion for gifts and estates from $11.7 million per person to approximately $6 million, which is the amount someone can give away either during their lifetime or death free of estate tax. Any estates above that number are taxed at 40%. The higher amount was scheduled to go down to $6 million in 2026 and the law would accelerate the change. This is a substantial change that could mean millions of dollars of additional tax for families over these limits.
3. Increase top capital gains rate to 25%.
Current capital gains rates are 0%, 15%, and 20% based on a taxpayer’s income. The zero and 15% rates would not change but the top rate increases, and the income needed to get to the top rate is lowered by approximately $45,000.
4. No more Backdoor Roth IRA contributions.
A popular strategy for high income clients to make annual after‐tax IRA contributions and then convert those dollars to a Roth IRA (commonly known as backdoor Roth contributions) could be eliminated. The proposed law unfortunately prohibits converting after tax dollars in retirement accounts.
5. Elimination of Grantor Trust benefits.
The proposed law makes many popular estate planning trusts much less appealing and virtually ineffective. Some common grantor trusts are Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and Intentionally Defective Grantor Trusts (IDGTs). For a nice summary of these trusts please read Alex Perkin’s blog post about them on our website.
6. Family Limited Partnership and LLC Discounts reduced.
Discounts for “nonbusiness” assets will not be allowed. Think investment assets and real estate.
7. Net Investment Income Tax (NIIT) applied S Corporation Income for high income owners.
Current law does not subject S Corporation income to the 3.8% NIIT. This law would change that for those with income over $400,000 (single filers) or $500,000 (joint filers). Together with the change to the top ordinary income tax bracket, this change increases the top tax rate for high‐income S corporation owners from 37% to 39.6% +3.8%=43.4%. Never underestimate Congress and their sneaky way of escalating taxes!
8. Child tax credit extended.
Finally, one that can be beneficial instead of costly. The expanded child tax credit 2020 changes would be extended to 2025.
A few things that President Biden proposed are noticeably absent from the bill, notably any changes to step up basis rules upon death. For now, tax basis will continue to be stepped up to current market value. When would these changes take effect? The changes to the top capital gain rate would be retroactive to the bill’s release date of 9/13/21. Don’t run out and sell appreciated holdings thinking you will get in under the wire. Grantor trust rule changes will likely take effect when the legislation becomes law, which could be within a few weeks or a few months. Having said that, grantor trusts created before the effective date will likely be “grandfathered” and the new rules only applicable to future trusts. For the rest of the changes the proposed effective date is January 1, 2022.