Uncertainty Still Reigns: An Update on the Tax Proposals
A Year of Changing Tax Proposals
So much has changed over the course of the year in the future world of estate and income taxes.
In March of this year, a proposed estate and gift tax reform was brought before the Senate by Democratic Senators Sanders, Gillibrand, Reed, and Van Hollen under the title, “For the 99.5% Act.” This proposal would have large implications on taxes and estate planning techniques and put financial planners on alert. We wrote about that Act here.
Time passed, and we anxiously waited. Then on October 7, the House Ways & Means Committee brought forth their plan, which reflected most of the provisions in the earlier Senate proposal. We commented on the proposal in our blog.
Interestingly, these proposals hit heavy resistance from both the Left and the Right. Along with the fight for the $3.5 trillion spending bill, which continues to be reduced and debated, the President and the House seem to be aligning around much fewer radical changes for tax and estate planning.
A new $1.75 trillion economic proposal was released on October 28th as a compromise. Schwab does a good job summarizing the current proposal in this article. Here are some key highlights, which we view as a favorable outcome for most of our clients.
Summary of Current “Compromise” Proposal
Income Taxes
Individual Income Tax Rates. The House bill proposed increasing the top rate from 37% to 39.6% for individuals over $400,000 in income, but the proposal was dropped from the compromise bill.
Surtax on Wealthy Individuals. A 5% surtax would apply to individuals with income over $10 million. An additional 3% surtax would apply to income over $25 million (based on MAGI). This remains.
Surtax on Estates and Trusts. A 5% surtax would apply to trusts with income over $200,000 and a 3% surtax at the $500,000 level. This remains.
Corporate Tax Rate. The House bill proposed a new top corporate tax rate of 26.5%. That was replaced in the compromise bill with a 15% minimum tax to ensure that no corporations can use loopholes and incentives in the tax code to pay a lower rate.
Capital Gains
The House bill proposed a new top rate on capital gains and dividends of 25% for individuals with more than $400,000 in income, but the proposal was dropped from the compromise bill. Highest taxes remain at 20% plus the 3.8% Net Investment Income tax for high-income earners.
Estate Tax
Exemption. The House bill would have dropped the number of inherited assets exempt from the estate tax from the current level of $11.7 million to about $6 million. The proposal was dropped from the compromise bill.
Tax Rate. The original Democrat proposal sought to raise the current 40% tax rate. This has been dropped.
Expiration Date. The current laws are set to expire on December 31, 2025. This remains the case.
Grantor Trusts and GRATs. The House bill would have had a significant impact on various estate planning strategies such as the use of Grantor Trusts and GRATs. The current proposal makes no mention.
Roth IRA Conversions
The House bill would have prohibited Roth IRA conversions for both traditional IRAs and employer-sponsored plans for taxpayers with incomes above $400,000, but the proposal was dropped from the compromise bill.
The House bill would have prohibited Roth IRA conversions for wealthier taxpayers beginning in 2032. That provision was dropped from the compromise bill.
Miscellaneous Taxes
Cap on Aggregate Retirement Account Balances. The House bill proposed that individuals with more than $10 million in tax-advantaged retirement accounts would be required to take required minimum distributions (RMDs), regardless of their age. That proposal was dropped from the compromise bill.
Billionaires’ Tax on Unrealized Gains. An idea was floated in the Senate to levy an annual tax on unrealized gains for individuals with $1 billion+ in assets. This has been removed.
So, What Do We Do?
As Martin Shenkman wrote in his Forbes commentary, “uncertainty still reigns”:
There are many miles to travel before a final bill is signed off by the President. And what the final Bill will include is still a mystery. Yet, it does appear that the radical changes that emerged at the start of the year have gone by the wayside. If the current plan goes through, then there are still critical tax and estate planning strategies to pursue but the urgency to complete before the end of the year or before signing seems to be waning. Nevertheless, it is prudent to stay aware and be ready.
