Top tax questions on the minds of financial professionals

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 09/13/21


It’s been a busy summer for lawmakers as Congress begins debate on what could be a historical tax and spending package. Both the Senate and House have passed budget resolutions that pave the way to advance legislation through the budget reconciliation process. This would require only 50 votes in the Senate to proceed.

For advisors, the biggest concern is how the tax landscape could change and when.

As we head into the fall, here are the key questions we’ve received from advisors in recent weeks.

1. What are the most likely tax increases on the horizon?

While it’s essentially impossible to predict with a high level of conviction how these policy discussions on Capitol Hill will conclude, there are a few tax proposals we believe have a greater likelihood of making their way into final legislation.

First, given the need to generate revenue to offset spending priorities favored by the Democratic caucus (expanded Child Tax Credit, additional premium assistance for Obamacare, etc.), we would expect an increase in the corporate tax rate. While the Biden administration has proposed an increase from the current 21% rate to 28%, it appears certain moderate Democrats are more comfortable with a corporate rate around 25%. A recent proposal from the House Ways & Means Committee calls for a corporate rate of 26.5%. While many commentators are focusing entirely on the tax rate itself, there are a host of other provisions on the table that would increase corporate taxation (imposing a 15% minimum tax on global book income, for example). Between the rate increase and some of the other provisions, we would expect revenue from corporate taxation to increase beginning in 2022.

Second, we expect the top marginal income tax bracket to increase from 37% to 39.6%. According to details provided by the Treasury Department the 39.6% rate would apply to taxable income above $452,700 ($509,300 for married couples filing a joint return). At these levels, that means a portion of income currently taxed at 35% would be subject to a 39.6% rate, and all income currently taxed at 37% would be taxed at 39.6%. Additionally, the initial House Ways % Means proposal calls for the top bracket to apply at $400,000 of taxable income ($450,000 for married couples filing a joint return). Of course, these details are subject to negotiation during the debate process.

Lastly, there is support to increase the tax rate on long-term capital gains from its current level of 20% (not including the 3.8% surtax on net investment income). The administration has proposed taxing long-term capital gains as ordinary income (39.6% not including the 3.8% surtax) for those with income exceeding $1 million. We anticipate an increase in the capital gains rate not to exceed 28% (not including the 3.8% surtax). House Ways & Means is calling for a statutory rate of 25% on capital gains with an additional 3% for taxpayers with more than $5 million in income (not including the 3.8% surtax). Whether a capital gains tax would apply on assets passed to heirs at death, or based on lifetime gifts, is less clear. This provision is not currently included within the House Ways & Means proposal, and Democrats don’t seem to have the 50 votes in the Senate required to make these changes. Many lawmakers have expressed concern about how these provisions would impact family farms and closely held family businesses.

2. If we see an increase in the capital gains tax rate, what effective date would apply?

This has been the most prevalent question in recent conversations with advisors. Earlier this year, the Treasury Department called for an effective date to apply to transactions “after the date of announcement.” Presumably this would be April 28, 2021, when the American Families Plan was introduced, but this is not entirely clear. Whatever the case, we believe a date tied to the end of April is unlikely. As congressional committees are tasked with applying details to the budget resolutions that were passed in each chamber, an effective date for a capital gains tax increase could be tied to when the provision is announced by the tax-writing committees in Congress (Senate Finance, House Ways & Means). Committees face a deadline of September 15 to provide these details. Or, an effective date could be tied to when the legislation is ultimately passed by Congress.

The longer this debate continues, the greater the chance that the effective date for a capital gains rate increase may be applied beginning in 2022. Ironically, if the date for a capital gains tax increase is pushed to 2022, this will likely generate more revenue in the short-term as some investors choose to realize gains before the end of the year.

3. What other potential tax law changes are being monitored?

It will be interesting to see how the debate around easing the limit on state and local tax deductions (SALT) materializes. While there is some bipartisan support among lawmakers representing higher-taxed areas, we believe any easing of the current $10,000 cap would be limited based on household income. The initial proposal from House Ways & Means does not call for any relief from the SALT deduction cap. For more insight, see our recent post on the SALT deduction.

We will also follow certain aspects of the tax code that some lawmakers perceive as “loopholes.” Some examples include:

  • Using a short-term, “zeroed out” grantor retained annuity trust (GRAT) to shelter future appreciation of assets from gift and estate taxation
  • The ability for family-owned businesses to efficiently transfer wealth to heirs by leveraging valuation discounts
  • Multi-generational “dynasty trusts”
  • The backdoor Roth IRA contribution strategy
  • Sale of assets to intentionally defective grantor trusts (IDGTs)
Lastly, given the complexity and lack of consensus around taxing appreciated wealth transferred to heirs at death, lawmakers could instead reduce the lifetime gift and estate tax exclusion. However, since the figures are slated to decrease after 2025 (from current $11.7 million/person to $5.5 million adjusted for inflation), the benefit of making a change now does not produce much revenue to offset other costs. That being said, the House Ways & Means proposal calls for accelerating the sunset of the gift and estate tax lifetime exclusions to expire at the end of 2021. A fallback position for lawmakers seeking to target stepped-up cost basis at death may be to apply carryover basis on assets passed at death instead. Though taxes would not be due when appreciated assets are inherited, the original (adjusted if applicable) cost basis of the previous owner would carry over to the heir.

Review tax planning

Advisors will be closely monitoring tax policy developments. As more clarity emerges during the debate, they can identify potential changes to tax laws. As a result, taxpayers may want to consider certain planning strategies to mitigate the impact of higher taxes in the future.

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