How Proposed Federal Tax Changes Could Affect You

President Biden’s three-part tax program has been released as part of his fiscal year 2022 budget. The first phase, the American Rescue Plan, was enacted in March 2021 provides a child tax credit advance in addition to some other temporary tax relief measures. The other two components to Biden’s tax proposal are the American Families Plan and the American Jobs Plan. Before becoming law, Congressional approval is required. As currently proposed, here is a summary of what President Biden has requested.

For individuals and families, the American Families Plan includes the following major tax changes:

• Raise the top marginal income tax rate from 37% to 39.6% for high income earners (over $452,700 for single filers; $509,300 for joint filers);
• Tax long-term capital gains as ordinary income for taxpayers with AGI above $1 million. This would result in a top marginal rate of 43.4% when Net Investment Income Tax (NIIT) is applied;
• Tax unrealized capital gains at death for unrealized gains above $1 million for single filers (eliminate the step up in cost basis at death); however, this excludes gains on tangible personal property, family-owned farms, and the existing exclusion for capital gain on certain small business stock;
• Apply the 3.8% NIIT to active pass-through business income for those earning over $400,000;
• Cap deferred capital gains in 1031 Like-Kind Exchanges to $500,000;
• End the preferred treatment of carried interest for those earning over $400,000;
• Extend the enhanced Child Tax Credit which provides $3,600 for children under 6 and $3,000 for children 6 to 17; and,
• Continue or enhance certain public policy tax credits like the Health Insurance Premium Tax Credits and the Employer-Provided Childcare Tax Credit for businesses.

From an estate and gift tax perspective, Senator Sanders’ “For the 99.5% Act” proposed that tax-free, lifetime gifts be capped at $1M and that the estate tax exemption be reduced to $3.5M. Currently each taxpayer has $11.7M exemption to use during life or at death. The proposed Act also includes an increase in the graduated tax rates on estates and gifts to a maximum of 65% that includes a Generation Skipping Transfer Tax (“GST”) rate at 65% as well. Currently, the top tax rate is 40%.

The American Jobs Plan is focused on the corporate tax rate with an increase from 21% to 28%. Perhaps more intriguing is Biden’s proposal of a 15% minimum corporate tax on the pretax corporate book income for firms with $2 billion or more in net income. There are a handful of other major tax changes that impact corporations, like disincentivizing foreign fossil fuel, limiting certain credits and deductions and prioritizing clean energy with various clean energy tax credits.

President Biden also wants to increase Internal Revenue Service (IRS) funding by $72.5B over the next decade and make IRS reporting and compliance changes to increase tax collections.

So what does this mean from a tax planning perspective? First, certain taxpayers will probably see some tax increases, but Biden has signaled that he is willing to negotiate to garner Republican support. Second, many commentators believe that the step up in cost basis at death is unlikely to be eliminated. Third, wealthy taxpayers may want to leverage the historic estate and gift exemption before they are drastically reduced. Last, tax-deferred real estate transactions may be in danger. It is important to remember that every taxpayer’s situation is different, and decisions should be made in conjunction with competent legal, tax and financial advice. The Pinnacle Trust and Investment Advisory team is available to provide distinctive service and effective advice as the tax landscape changes over the next few months.

Cort Bethmann is a trust and wealth advisor based at Pinnacle Financial Partners’ office in downtown Murfreesboro, TN. He can be reached by phone at (615) 744-5136 or by email at Cort.Bethmann@pnfp.com.