On September 13, 2021, the House Ways & Means Committee released sweeping tax proposals included in the $ 3.3 trillion reconciliation legislation currently under active consideration by Congress. It is likely that many substantial changes will be made during this process of transposition into law. Most of the proposed changes come into effect after December 31, 2021, with the primary exception of increases in the capital gains rate, all provisions are subject to further debate and change, but here is the current situation:

Income tax provisions

• The top marginal tax rate would drop from 37% to 39.6% for married persons filing joint returns with taxable income greater than $ 450,000; single taxpayers with taxable income greater than $ 400,000; and married persons filing separate returns over $ 225,000. (This increase would also apply to trusts and estates with taxable income greater than $ 12,500.)
• A surtax equal to 3% of a taxpayer’s adjusted gross income (AGI) greater than $ 5 million (or $ 2.5 million for a married person filing separately) would be imposed.
• Net investment income tax would be extended to cover net investment income derived in the ordinary course of a business or trade for individuals with taxable income greater than $ 400,000, or $ 500,000 for individuals. individuals completing a joint return, as well as for trusts and estates.
• The deduction for eligible business income would be changed by setting a limit on eligible deductions at $ 500,000 for individuals filing a joint return; $ 250,000 for a married person filing a separate return; and $ 10,000 for a trust or estate.
• The bill would increase the long-term capital gains rate from 20% to 25%, with effect for tax years ending after September 13, 2021. However, a transitional rule provides that the pre-existing rate of 20% provided for by law would continue to apply for the portion of the taxation year beginning before that date. Gains recognized later in the same tax year that arise from transactions entered into before September 13, 2021 under a written binding contract (and which are not subsequently amended in any material respect) would be considered that took place before September 13, 2021.
• The bill would permanently prohibit “excess business losses” (ie. The provision would allow taxpayers whose losses are not allowed to carry forward those losses to the next tax year.

Provisions relating to inheritance and gift tax

Reduction of the exclusion from inheritance and gift tax

• The bill would reduce the federal inheritance and gift tax exclusion to its 2010 level of $ 5 million per person, indexed to inflation, applicable to deceased persons and donations made after the 31st. December 2021.

Certain tax rules applicable to transferor trusts

• The bill targets Grantor Trusts and would essentially shut them down as a planning vehicle.
• Assets held in a grantor’s trust would be included in the grantor’s estate.
• Distributions from the settlor’s trusts (other than to the settlor or his or her spouse) would be treated as donations made by the settlor.
• If a grantor trust ceases to be treated as such during the life of the grantor, the grantor would be deemed to donate the assets of the trust.
• Sales between a grantor and its grantor trust would no longer be disregarded for income tax purposes.
• These rules would apply to any trust created from the date of promulgation and to any part of the trust attributable to contributions made from the date of promulgation.

Valuation rules for certain transfers of non-commercial assets

• The bill attempts to suppress discounts on the valuation of inheritance and gift taxes applied to transfers of family entities by prohibiting discounts for non-commercial assets held in an entity. A non-business asset is a passive asset that is held for the production or collection of income but is not used in the active conduct of a trade or business. So, for example, setting up a limited partnership or family limited liability company and financing it with securities would no longer be a viable strategy for transferring securities at a discount.
• This provision would apply to transfers after the date of promulgation.

In addition to these provisions, there are proposals on business income, IRA and IRS funding, international income taxation and more. How one of these will ultimately be implemented (if any) is very uncertain and anyone can guess,

The point to remember is 1) to now execute the planning using existing tax laws and 2) the planning should be structured in such a way that if there is a negative tax consequence of the planning due to the changes, the plan can be unraveled without a hassle.

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