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House Tax Proposal Demands Urgent Action

3 years ago

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By Chris Carns

The House Ways and Means Committee put forth a broad, impactful tax proposal that addresses many of the promises of the Biden administration. If enacted, many of the proposed changes would go into effect on January 1, 2022; however, some would go into effect as of the date of the introduction of the proposal, September 13, 2021.

The proposal requires urgency in financial, tax, and estate planning and includes the following:

  • Increase in Capital Gains Tax Rate– Long term capital gains tax rates would be increased from 20% to 25%.  This change applies to taxable years ending after the date of introduction of the proposal, September 13, 2021. [1] While a 25% increase in the rate, this is much more favorable than the proposal to raise the rate to ordinary income tax rates for those earning more than $400,000 or $1,000,000 per year that had been proposed by multiple legislators.
  • S Corporation Advantage-The Net Investment Income tax would be significantly expanded to apply to all business income for taxpayers with more than $500,000 of income on a joint return or $400,000 for a single individual. [2] This change would eliminate the benefit that using an S corporation structure provides for some small business owners.
  • Estate and Gift Tax Exemption Lowered– Currently, the amount of wealth that can be transferred without any gift, estate or generation skipping transfer tax is $11.7 million. The House proposal accelerates the 2026 reduction back to $5 million per person inflation adjusted from 2026 to 2022.  Therefore, it is estimated that estate and gift taxes would be payable for any transfers in excess of $6.2 million in 2022.
  • Increase in Ordinary Income Tax Rate– The plan raises the top marginal tax rate on individual income from 37% to 39.6% and adds a 3% surcharge on income above $5 million for a married household (or $2.5 million for an individual filer). 
  • Increase in Corporate Tax Rate– The proposal would raise the top corporate tax rate to 26.5%, and it would create three tax brackets for corporations: 18% for corporations with under $400,000 in net income, 21% from $400,000 to $5 million in net income, and 26.5% percent over $5 million.

In addition, the proposal affects Section 199A deductions, restricts the use of business losses, modifies grantor trust rules and family entity planning, among other changes. With only a few months left in 2021 and many of the proposed changes becoming effective on January 1, 2022, if enacted, it is important that you review your current assets and estate plan and consult with your advisors to ensure you take advantage of any tax and wealth preservation planning opportunities available now, before it is too late.

[1] https://www.forbes.com/sites/martinshenkman/2021/09/16/house-estate-tax-proposal-requires-immediate-action/?sh=29f8b46e3077

[2] https://taxfoundation.org/ways-and-means-plan-the-good-the-bad-and-the-ugly/

Disclaimers

January 17, 2024

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