Democrats Introduce Tax Proposals | Foley & Lardner srl
The chairman of the House Ways and Means Committee on Monday presented new tax proposals that would generate more than $ 2 trillion in tax revenue as part of Democrats’ efforts to reverse tax cuts in the Trump administration. The tax proposals primarily affect corporations and the wealthy, with provisions changing the corporate tax rate, the inheritance tax exemption, capital gains tax and placing limitations on trusts licensors and valuation discounts for non-commercial assets.
Tax changes for individuals and corporations
The bill lowers the highest personal tax rate from 37% to 39.6% for married people declaring jointly with taxable income above $ 450,000, heads of households with higher taxable income at $ 425,000, unmarried individuals with taxable income over $ 400,000, married individuals filing separately with income over $ 225,000, and estates and trusts with taxable income over $ 12,500. An additional 3% surtax is imposed on income over $ 5 million (or $ 2.5 million for a married taxpayer filing separately). The 199A qualifying business income deduction would no longer be available to individuals earning over $ 400,000 or married couples earning over $ 500,000. Capital gains tax rates (currently 20%) are raised to 25% for income over $ 400,000.
Other tax increases in the proposed bill include replacing the fixed corporate tax rate of 21% with a graduated rate structure; the proposed maximum rate would be 26.5% for revenues over $ 5 million (and the graduated rate benefit would be phased out for corporations with revenues over $ 10 million).
These changes would be effective from January 1, 2022 (with the exception of the increase in capital gains, which would be effective from the date of the proposal, September 13, 2021).
Exemption from inheritance tax
Under the proposed bill, the amount of the inheritance tax exemption, which is currently $ 11.7 million per person, would drop to $ 5 million (indexed to inflation) as of January 1 2022. This reversion was previously scheduled for the end of 2025. However, an eligible building used on a family farm or family business would be entitled to a special assessment reduction of $ 11.7 million based on its actual use instead. than its fair market value.
Changes to grantor trusts and valuation rebates
The bill would include grantor trusts in a deceased’s taxable estate where the deceased is the deemed owner of the trusts for income tax purposes, removing a popular tax planning strategy. Sales between grantor trusts and their deemed owner would be treated as sales between the owner and a third party, rather than their current status being treated as an ignored transaction. This would only be effective for future trusts and future transfers made after the enactment of this provision.
The bill would also limit valuation haircuts on non-trading assets. Currently, a taxpayer can benefit from a haircut on an asset, including publicly traded stocks, by placing it in a limited liability company or other entity and then distributing it among the taxpayer’s heirs. or trusts for the benefit of the taxpayer’s heirs. The new owners do not have full control of the asset and therefore claim a discount on the value of their interest. According to the proposal, such discounts would no longer be allowed for “passive” assets, meaning that those that are used are only intended for income generation. Discounts for assets used in active businesses (such as farms or family businesses) would still be allowed.
Changes to retirement accounts
The bill would impose new contribution limits on retirement accounts (traditional IRAs, Roth IRAs, or defined contribution accounts), essentially prohibiting new retirement account contributions from taxpayers whose total retirement account balance exceeded $ 10 million. dollars in the previous tax year. This applies to married couples with taxable income over $ 450,000, single people with income over $ 400,000, and heads of households with taxable income over $ 425,000. After any year in which a taxpayer’s total retirement account balance exceeds $ 10 million, the taxpayer would be required to make a special minimum withdrawal (50% of the amount greater than $ 10 million).
For accounts in excess of $ 20 million, the excess must be allocated to the lesser of the following amounts: (1) the amount necessary to bring the total balance of all accounts to $ 20 million; or (2) the overall account balance. For the purpose of this withdrawal, the account holder must first make the special minimum withdrawal from their Roth IRAs or defined contribution plans.
Under current law, a taxpayer is able to avoid the income limitations for Roth IRA contributions by converting rather than contributing to a Roth IRA. To shut down these so-called “stolen” Roth IRA strategies, the proposal eliminates Roth conversions for IRAs and employer-sponsored plans for single taxpayers (or married taxpayers filing separately) with taxable income above $ 400,000, married taxpayers declaring jointly with taxpayers income greater than $ 450,000 and heads of household with taxable income greater than $ 425,000. All conversions of after-tax employee contributions to qualifying plans and of after-tax IRA contributions to Roth would be prohibited, regardless of income level. These changes to the pension plan would come into effect on January 1, 2022.
Provisions not included
Several provisions that had been considered in the months leading up to the bill were ultimately not included. The bill would not eliminate the basic “mark-up” on death, a mechanism by which the assets of a deceased person are deemed to have been purchased at fair market value on the date of the person’s death. This eliminates taxes on capital gains attributable to capital appreciation and depreciation accumulated up to the date of death.
The bill does not impose the “deemed realization” provision contemplated by President Biden, which would have caused an income tax realization event at the time of transfer (for example, by gift or death) without the basic advantage. In other words, the taxpayer will be deemed to have sold the transferred asset, resulting in income, but without the corresponding proceeds of the deemed sale to pay income tax.
Biden’s original proposals also included changes to Settlor-Keeped Annuity Trusts (“FREEs”), which are irrevocable fixed-term trusts that pay the settlor an annuity over the life of the trust and then distribute the assets to individuals. non-charitable beneficiaries (often the constituent’s children). Biden proposed a minimum required term of at least 10 years and a limitation on the duration of the Libres to a maximum of the grantor’s life expectancy plus 10 years. It was not included in the bill.
An imminent concern was that certain provisions of the tax bill would be retroactive to January 1, 2021, leaving those affected with no time to implement suitable tax planning strategies. The proposals published by the Ways and Means Committee do not include this retroactive implementation.
Adoption of the proposal
To pass without Republican support, the bill would need a vote of nearly every House Democrat and all 50 Senate Democrats. The House Ways and Means Committee is expected to vote on the proposed tax provisions this week; a majority vote of the committee is required for the bill to be presented to the House.