Q: What’s the goal of the current tax proposals?
A: Overall, the Biden administration’s tax proposals seek to increase tax revenue to support various government plans to fund needs such as investment in infrastructure.
By targeting specific groups, such as large corporations with overseas operations, the intent is to move tax revenue back to the US and reward operations, including jobs, to those companies doing so within the US.
Q: What changes can businesses expect?
A: Many of the proposals to impact corporations are summarized in the Made in America Tax Plan. First, the 2017 change to lower the corporate income tax to 21% will be bumped up to 28%. Also proposed is a global minimum tax, to ensure that corporations pay a minimum tax on income.
In addition, it has been reported that there are many Fortune 500 companies that have paid $0 in US taxes in recent years. To address this, the new tax plan proposes there would be a minimum tax of 15% on the GAAP or book income of large corporations.
Q: Will changes be limited to corporations?
A: Likely not. There are expected to be provisions, outlined in the American Families Plan, to increase overall income taxes on individuals with income greater than $400 thousand (dollars). These include restoring the top marginal rate of 39.6% to this income group.
Other possibilities include an increase in the capital gain rates for individuals in higher income brackets. Some suggestions have capital gains taxed at ordinary and not preferential capital gain rates at certain income levels.
Q: What can you tell me about the proposals in “For the 99.5% Act”?
A: Historically, the estate exemption has been– and will continue to be – a moving target. This proposal has a reduction in the estate exemption from the current $11.7M to $3.5M.
The tax rates on any estate above this exemption would rise from a max 40% rate to 45% for estates between $3.5M and $10M.
And the rates would only go up from there, at graduated rates of 50%, 55% and 65% on estates greater than $1 billion.
Q: Anything else we need to think about with the current proposals?
A: There’s a lot of discussion surrounding step-up basis rules with estates and trusts. Some propose eliminating step-up in basis at death and taxing the unrealized gains. There are potential provisions to allow a $1 million exemption amount of the unrealized gains.
There’s a lot of wealth that has remained untaxed due to this and lawmakers are looking for ways to tax these pockets of income and allow for more equitable distribution of tax liabilities.
Q: What can taxpayers do now?
A: Currently, everything presented is in proposal, and not final regulation form. There is almost certainty that how this is presented is not how it will be presented in final law.
While there is a risk that the proposals would become effective upon enactment, or even retroactively, it is almost certain any change will be made effective no later than December 31, 2021.
For example, for changes to grantor trusts, existing trusts will likely be grandfathered in. Therefore, there may be strategies to implement before year-end. It is important, especially for an individual with assets greater than $3.5M, to review their current strategy.
To address tax changes on high-net-worth individuals as well as a complete overhaul on estate and wealth transfer, two proposals have been introduced.
The “For the 99.5% Act” introduced by Senators Bernie Sanders and Sheldon Whitehouse seeks to increase tax revenues from the absolute top privately-held wealth in the country.
In addition, the “Sensible Taxation and Equity Promotion (STEP) Act” was introduced by Senators Booker, Van Hollen, Sanders, Whitehouse, and Warren to address the same issues with a slightly different approach.
|For the 99.5% Act||STEP Act|
|Reduce estate and GST exemption to $3.5M||Eliminates step up basis upon death|
|Reduce gift exemption to $1M||Taxes unrealized gains when gifted or inherited|
|Increase tax rates – 45% >$3.5M up to 65% >$1B||$1M exclusion on taxation of unrealized gains, reduced by utilized $100K annual exclusion|
|New limitations on gifting annual exclusions||Assets held in non-grantor trusts are taxed every 21 years on unrealized gains|
|Restrictions on longevity of various trusts||Allows for a 15-year period to pay taxes due on illiquid assets|
|Limits step up for trust assets outside estate|
|Limitations on valuation discounts|
The effective dates of these proposals vary from upon the date of enactment to December 31, 2021.
The “Made in America Tax Plan” includes proposals for tax increases on businesses with overseas operations. Many large corporations have been able to have operations across the globe to benefit from lower tax rates in different countries.
|Made in America Tax Plan|
|Corporate tax rate to increase from 21% to 28%|
|Increase the global minimum tax to 21%|
|Enforce a minimum tax of 15% of book income for large corporations|
|Strengthen anti-inversion rules|
|Adjustments to Global Intangible Low-Taxed Income (GILTI)|
|Repeal tax preferences for the fossil fuel industry|
|Eliminate deductions when offshoring jobs and provide credit for onshoring jobs|
Barnes Dennig is here to help you with questions on these matters or assistance in tax planning for 2021 and beyond. If you think your business could benefit from any of these tax situations, please contact your Barnes Dennig team so that we can help you work through all of the details. We’re here to help.