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Proposed US Tax Reform - What it could mean for you and your family

Estate planning
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Tax

Proposed US Tax Reform - What it could mean for you and your family

On September 13, 2021, the US House Ways & Means Committee released an initial tax proposal for raising revenue to fund in part the Biden administration’s Build Back Better Act infrastructure package. The newly unveiled tax proposal is wide ranging and covers a number of different areas impacting individuals, businesses, estates and trusts, and if enacted it would make several dramatic changes that could impact all taxpayers.

It must be noted that it is very early in the legislative process, and this merely a proposal coming out of the House Ways & Means Committee. A final bill has not yet been released to the House of Representatives. Any official bill still needs to be passed through and ratified by both the House and the Senate, with reconciliations of differences between both before anything is ultimately voted on and signed by President Biden. Changes to this proposal will most certainly occur before any provisions become law, and the current proposal is by no means final. Nonetheless, the House Ways & Means Committee proposal provides the first concrete material advanced by Congress that provides some insight for where we may be headed with tax reform. 

The following summary includes some key items included in the House Ways & Means proposal that may be of interest to you and your family, along with the proposed effective dates. For some provisions, the changes would go into effect for future tax years, after December 31, 2021. For other provisions, the proposed changes would go into effect as of the date of this proposal – in other words, September 13, 2021. There are also other provisions that become effective as of the date of enactment by Congress. That detail is important, but like every piece of this proposal, it could change.

Corporate Tax Changes

  • Modification and Increase to Corporate Tax Rate. The proposal would replace the flat corporate income tax with a graduated corporate income tax. Instead of a flat rate of 21 per cent, the rate structure would provide for a tax at a rate of 18 per cent on the first USD400,000 of income; 21 per cent on income up to USD5,000,000, and a rate of 26.5 per cent on income thereafter. Additionally, the benefit of the graduated rate would phase out for corporations earning more than USD10,000,000. This provision would apply to taxable years beginning after December 31, 2021.
  • Modification to the Carried Interest Holding Period. The proposal would increase the holding period for which a taxpayer must qualify for capital gains treatment on carried interest from 3 to 5 years. This provision would apply to tax years beginning after December 31, 2021. 
  • Limitation on Qualified Small Business Stock Exclusion. The proposal would disallow the special 75 per cent and 100 per cent exclusion rates for gains realized from certain qualified small business stock if the taxpayer has adjusted gross income equal to or exceeding USD400,000. The baseline 50 per cent exclusion would still remain available for all taxpayers. This provision would apply to sales and exchanges after September 13, 2021. 

Individual Income Tax Changes

  • Increased Income Tax Rates. For taxpayers with income over USD400,000 (or USD450,000 if married filing jointly), the top marginal rate of tax will be increased from 37 per cent to 39.6 per cent. This provision would apply to taxable years beginning after December 31, 2021.
  • Increased Capital Gains Tax Rate. For taxpayers with income over USD400,000, the top capital gains tax rate would be increased from 20 per cent to 25 per cent. This provision would applyto taxable years ending after the date of the introduction of the Act. However, this provision includes a transition rule which provides that the preexisting rate of 20 per cent would apply to gains and losses for the portion of the taxable year before the date of introduction of the Act.
  • Expanded Net Investment Income Tax. The proposal would expand the net investment income tax to cover net income derived in the ordinary course of a trade or business for taxpayers with income over USD400,000 (or USD500,000 if married filing jointly). This provision would apply to tax years beginning after December 31, 2021. 
  • Surcharge on High Income Individuals, Trusts, & Estates. The proposal would impose a surcharge tax of 3 per cent of a taxpayer’s modified adjusted gross income, to the extent it exceeds USD5,000,000 (or in excess of USD2,500,000 for a married individual filing separately). This provision would apply to tax years beginning after December 31, 2021. 
  • Termination of Temporary Increase in Unified Credit for Transfer Taxes. The 2017 Tax Cuts and Jobs Act temporarily doubled the unified credit applicable to the estate tax, gift tax and generation skipping transfer tax, and was previously scheduled to expire after December 31, 2025. This provision would effectively call for an early expiration of the temporary increase in unified credit, to December 31, 2021. After that date, the unified credit for these exemptions would revert to its 2010 level of USD5,000,000 per individual, indexed for inflation. 
  • Limitations on the Use of Grantor Trusts. Under current law, an individual can be treated as the owner of a trust for U.S. income tax purposes (i.e., a “grantor trust”) without the assets of the trust being part of the individual’s taxable estate. The proposal would add new legislation which brings assets back into the grantor’s taxable estate if the trust is a grantor trust. The provision would also treat sales between an individual and their grantor trust as equivalent to a sale between the owner and a third party. This provision would provide a “grandfather rule” for existing trusts and transfers, and apply only to future trusts and future transfers after the date of enactment of the Act. 
  • Valuation Rules for Certain Transfers of Nonbusiness Assets. The proposal amends current law to disallow a valuation discount for transfer tax purposes when transferring nonbusiness assets (i.e., passive assets that are held for the production of income and not used in the active conduct of a trade or business). Certain exceptions and look-through rules will apply. This provision would apply to transfers after the date of enactment of the Act. 

Retirement Taxation Changes

  • Limitation on Contributions to Large Account IRAs. For taxpayers with income above USD400,000, new contributions to a traditional IRA or Roth IRA would be prohibited if the aggregate value of the taxpayer’s applicable retirement accounts exceeds USD10 million as of the close of the preceding calendar year. The provision would be effective for tax years beginning after December 31, 2021.
  • Increased Required Minimum Distributions for Large Retirement Accounts. For taxpayers with income above USD400,000 and an aggregate value of applicable retirement accounts that exceed USD10 Million, additional amounts will be required to be taken as part of the taxpayer’s required minimum distribution for the year. This provision is for tax years beginning after December 31, 2021.
  • Limitation of Roth IRA Conversions. For taxpayers with income above USD400,000, such taxpayers would be prohibited from converting amounts held in an applicable retirement account into a Roth IRA account. The proposal would also prohibit the conversion of any after-tax amount held in a retirement account to a Roth IRA for all taxpayers regardless of income level. This provision is for tax years beginning after December 31, 2021. 
  • Prohibiting in Self-Interest Investment in IRAs. The proposal would prohibit any IRA from owning more than 10 per cent of an interest in a non-publicly traded entity. This provision is for tax years beginning after December 31, 2021. For IRAs that already own more than 10 per cent of a non-publicly traded entity, such IRA will have until December 31, 2023 to divest itself of the interest in the entity in excess of 10 per cent.

Note that the current proposal is extensive and there are other items included in the proposal not covered here. As the proposal moves closer to becoming law, our team will provide additional insights, including possible planning opportunities which may be available to individual taxpayers. Stay tuned for more information, and as always, please reach out to your Relationship Manager for more information.

The newly unveiled tax proposal is wide ranging and covers a number of different areas impacting individuals, businesses, estates and trusts, and if enacted it would make several dramatic changes that could impact all taxpayers.


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