Seth’s notes re: the House Ways and Means Committee tax proposal from 9/13/2021.  Here’s what we’re following which, if passed, could have an impact on some of our clients.

  • Effective as of 9/13/21:
    • Increases top capital gains tax rate from 20% to 25% – this will kick-in at $400k (single) or $450k (married).  The effective date will be 9/13/2021 UNLESS there was a prior binding contract to sell (and the sale will take place before year-end)
    • Change the rules for Sec. 1202 Qualified Small Business Stock (QSBS) so taxpayers with over $400k (single)/$450k (married), trusts, and estates would NOT be eligible for 75% or 100% exclusion.   The 50% exclusion would remain available for all taxpayers.
  • Effective upon enactment (after 9/13/21 but before 1/1/2022):
    • Changes to Grantor Trusts would be effective immediately upon enactment!
      • Grantor Trusts will be included in decedent’s estate for estate tax purposes
      • Treat sales, exchanges, etc. of assets between grantor and trust as a taxable event
      • Common strategies impacts include GRATs, SLATs, and ILITs
  • Effective 2022:
    • Increases the top marginal rate from 37% to 39.6% for income over $400k (single filers) or $450k (married filers)
      • NOTE – those who are currently in the 35% bracket with income between $400-523k (single) or $418k-628k (married) will see the biggest impact from this rate change.  Also, the proposed legislation severely exacerbates the “marriage penalty”
    • Business profits from S-Corps will be subject to 3.8% surtax for taxpayers with MAGI over $400k (single) or $500k (married).  This will increase “true” top rate for S-Corp owners from 37% to 43.4%
    • Limits the QBI Deduction (Section 199A) for high income taxpayers
    • Adds 3% surtax on ALL MAGI over $5MM – this will apply to all filing statuses except married filing separately which will have this surtax imposed at $2.5MM.  Trusts will see the 3% surtax kick-in at ‘only’ $100k of income!
    • Roth conversion of after-tax funds in retirement accounts would be prohibited for ALL taxpayers starting 1/1/2022.  This would essentially eliminate the Backdoor Roth contribution planning strategy (you would need to get any last ones in before 12/31/2021!)
    • Prohibits traditional and Roth IRA contributions IF:
      • A) your taxable income is over $400k (single) or $450k (married), AND
      • B) total value of IRA and defined contribution plans > $10MM
          • These limitations do not apply to contributions to employer plans (401k, SEP, pension plan)
    • Imposes RMDs on large retirement account balances if:
      • A) your taxable income is over $400k (single) or $450k (married), AND
      • B) total value of IRA and defined contribution plans > $10MM
          • If your account is $10-20MM then the owner must distribute 50% of excess
          • If balance is > $20MM, you must satisfy the 50% RMD above, but first distribute lesser of:
      • A) 100% of the balance above $20MM, OR
      • B) 100% of balance in ALL Roth accounts
    • Estate tax exemption will be reduced by 50% starting 1/1/2022 – reverts exemption to pre-TCJA levels which means new exemption should be ~$5.85MM/person (~$11.7MM/couple).
    • Disallows valuation discount of nonbusiness assets for transfer tax purposes
    • Increases both the Child Tax Credit and the Child and Dependent Care Credits
  • Effective Later:
    • Prohibit Roth conversions for taxpayers in the highest tax bracket (Single over $400k or Married over $450k of adjusted taxable income) starting in 1/1/2032.  So there is a 10-year window to convert pretax accounts to Roth and pay tax upfront
    • Prohibits IRAs from investing in entities in which the owner has a “substantial interest” (50% ownership for public company; 10% for privately-held.  Blanket prohibition on directors and officers).  2-year transition window – fully in effect on 1/1/2024
  • Noticeably NOT included in the bill:
    • Alignment of top capital gains tax rate with ordinary income rate
    • Full phaseout of Sec 199A deduction (QBI)
    • Elimination of the carried interest loophole
    • Elimination of the step-up in cost basis at death
    • Social Security funding
    • State and Local Tax Cap (SALT)
    • NOTE – it’s expected that this may be revisited as part of a final bill… Some experts still expect the $10k cap would be eliminated, increased, or potentially phased-out with income…
    • Wealth Tax