Summary of the Biden Administration’s Proposed Federal Tax Changes

From: www.legacyplanninglawgroup.com

Summary of the Biden Administration’s PROPOSED Federal Tax Changes. On Monday, September 13, a tax bill was sent to the House Ways and Means Committee. Notably, there was no proposal to kill basis step up or to repeal the SALT deduction limitation. Here is a summary of the Biden Administration’s proposed federal tax changes:

INCREASE IN CORPORATE TAX

  1. The flat corporate income tax is replaced with a graduated rate structure. The rates are:
    1. 18% on the first $400,000 of income;
    2. 21% on income up to $5 million; and
    3. 5% on income thereafter.
  2. The graduated rate phases out for corporations making more than $10,000,000.
  3. Personal services corporations are not eligible for graduated rates.

TAX INCREASES FOR HIGH-INCOME INDIVIDUALS

  1. Increase in Top Marginal Individual Income Tax
    1. The top marginal individual income tax is increased 39.6%. This rate applies to:
      • Married individuals filing jointly with taxable income over $450,000;
      • Heads of households with taxable income over $425,000;
      • Unmarried individuals with taxable income over $400,000;
      • Married individuals filing separate returns with taxable income over $225,000; and
      • Estates and trusts with taxable income over $12,500.
    2. The amendments made by this section apply to taxable years beginning after December 31, 2021.
  2. Increase in Capital Gains Rate for Certain High-Income Individuals
    1. The capital gains rate is increased to 25%.
    2. The increase applies to taxable years ending after the date of introduction of amended statute.
      • The transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction.
      • Gains recognized later in the same taxable year that arise from transactions entered before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of
    3. Net Investment Income Tax to Trade or Business Income of Certain High Income Individuals
      • Expands the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and
      • The provision clarifies that this tax is not assessed on wages on which FICA is already The amendments made by this section apply to taxable years beginning after December 31, 2021.
    4. Limitation on Deduction of Qualified Business Income for Certain High Income Individuals
      • Amends section 199A by setting the maximum allowable deduction at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate.
      • The amendments made by this section apply to taxable years beginning after December 31, 2021.
    5. Limitations on Excess Business Losses of Noncorporate Taxpayers
      • Permanently disallow excess business losses (i.e., net business deductions more than business income) for non-corporate taxpayers.
      • The provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year.
      • This section applies to taxable years beginning after December 31, 2021.
    6. Surcharge on High Income Individuals, Trusts, and Estates
      • Imposes a tax of 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately).
      • Modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest.
      • Applies to taxable years beginning after December 31, 2021.

ESTATE AND GIFT TAX PROVISIONS.

  1. Reduction of unified credit.
    1. The unified credit against estate and gift taxes are reduced to the 2010 level of $5,000,000 per individual, indexed for
    2. Effective for estates after December 31, 2022.
  2. Increase in Limit of Estate Tax Valuation Reduction for Certain Real Property Used in Farming or Other Trades or Businesses
    1. Increase the special valuation reduction available for qualified real property used in a family farm or family
    2. This reduction allows decedents who own real property used in a farm or business to value the property for estate tax purposes based on its actual use rather than fair market value.
    3. This provision increases the allowable reduction from $750,000 to $11,700,000.
  3. Tax Rules Applicable to Grantor Trusts
    1. Pulls grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts.
    2. Treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third
    3. Applies only to only to future trusts and future transfers.
  4. Valuation Rules for Certain Transfers of Nonbusiness Assets
    1. No valuation discounts where a taxpayer transfers non-business assets,
    2. Nonbusiness assets are passive assets that are held to produce income and not used in the active conduct of a trade or business. Exceptions are provided for assets used in hedging transactions or as working capital of a business.
    3. A look-through rule provides that when a passive asset consists of a 10-percent interest in some other entity, the rule is applied by treating the holder as holding its ratable share of the assets of that other entity directly.
    4. Applies to transfers after the date of the enactment of this Act.
  5. No provision for eliminating basis step up

RULES RELATING TO RETIREMENT PLANS

  1. Limitations on High-Income Taxpayers with Large Retirement Account Balances
    1. Contribution Limits
      • No additional contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year.
      • The limit on contributions applies to:
        • single) with taxable income over $400,000.
        • married taxpayers filing jointly with taxable income over $450,000
        • heads of households with taxable income over $425,000
        • Income limit subject o cost of living adjustments
  2. New annual reporting requirement to IRS for employer defined contribution plans on aggregate account balances in excess of $2.5 million
  3. Effective for tax years beginning after December 31, 2021.
  4. Increase in Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances
    1. If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following
    2. This minimum distribution required if the taxpayer’s taxable income is over the above income amounts.
    3. The minimum distribution generally is 50% of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.
    4. To the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100% distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50% distribution rule
    5. Effective tax years beginning after December 31, 2021
  5. Tax Treatment of Rollovers to Roth IRAs and Accounts
    1. Elimination of Roth conversions for both IRAs and employer-sponsored plans if the individual exceeds the above income limits. This kills the back door Roth IRA in the 2017 Act.
    2. Prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level,
    3. Applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.
  6. Statute of Limitations with Respect to IRA
    1. The statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions is increased from 3 years to 6 years.
    2. Applies to taxes to which the current 3-year period ends after December 31,2021
  7. Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest
    1. An IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 % or greater interest.
    2. An IRA owner can invest IRA assets in a business in which he or she owns they own less than 50%,
    3. The 50% threshold is adjusted to 10% for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect The bill also prevents investing in an entity in which the IRA owner is an officer.
    4. Current law prohibited transaction rules become and IRA requirement. The IRA document must contain these provisions.
    5. Generally effective for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these.
  8. IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules
    1. For purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner’s death) are always a disqualified person.
    2. This section applies to transactions occurring after December 31, 2021.

While this is a proposal and not yet signed into law, it signals the intent of the committee and should be reviewed with respect for planning for the rest of the year.

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