How the Proposed $2.18 Trillion Tax Increase May Impact You

On September 13, 2021, the Democrats of the House Committee on Ways and Means released text of many proposed tax increases. Below are some highlights of the more impactful provisions generating attention.

• Increase of the corporate tax rate to a graduated structure topping out at 26.5%.
• Significant changes to the international tax regime.
• Increase of the top marginal individual rate to 39.6% for married individuals filing jointly with taxable income over $450,000, and single filers with taxable income over $400,000.
• Increase of the top capital gain rate for individuals to 25% (effective as of the release date of the proposal).
• A 3% surcharge on individuals with a “modified adjusted gross income” in excess of $5,000,000 (beginning in 2022).
• Expanding the application of the Net Investment Income tax to certain ordinary business income which has not been subject to FICA tax.
• Placing a $500,000 cap on the Section 199A pass through deductions (not an income limit but a deduction cap).
• Expansion of existing wash sale rules that disallow certain investment losses to broader assets including commodities, currencies and digital assets.
• Reverting the unified credit against estate and gift taxes to $5,000,000 per individual, indexed for inflation.
• Revisions to the grantor trust rules which may result in trust assets being included in one’s estate.
• Disallowance of valuation discounts for transfer of nonbusiness assets.
• Limitations on large, generally $10,000,000 or more, retirement accounts.
• Extend the holding period for carried interests from 3 to 5 years to attain long term capital gain treatment

Noticeably absent from the above list is a State and Local Tax deduction (“SALT”) fix, addressing the $10,000 SALT limitation imposed on individual taxpayers. Also absent are provisions dealing with basis step-up rules for inherited or transferred assets.

The above list is obviously not comprehensive nor is it detailed. Actually, we usually don’t like writing about proposals because they are just that – proposals. However, we thought it important to bring the above to your attention because they represent one of the largest proposed tax increases in history. But perhaps more important is what they are not. Many of the more onerous propositions of the Democrats are absent in the above list. This appears to be a moderate version of the previous proposals that were keeping taxpayers and their advisors up at night. While we cannot predict the future, this more moderate approach has a possibility of achieving widespread legislative support, or, at the very least, advancing some form of tax increases. Please keep in mind, this is the opening of a dialogue and things can change. To be continued…

To discuss how the latest proposed tax changes may impact you, please reach out to your Anchin Relationship Partner.