On April 28, 2021, in an address to a joint congressional session and a fact sheet published by the White House, President Biden introduced the American Families Plan, the President’s spending plan, and a number of tax changes to pay for it. The tax changes proposed by President Biden would include tax cuts and expanded credits for certain taxpayers, as well as increased tax rates and IRS enforcement for Americans with incomes over $ 400,000.
The changes proposed by the President are the latest in a series of proposals from the Democratic Legislature. Other plans have been proposed by Senators Bernie Sanders, Elizabeth Warren, and Chris Van Hollen. It will likely take a few months for any of these proposals to get through Congress, and if legislation is actually passed, the final details may be different from the ideas that are being introduced now.
1. The American family plan, President Joe Biden
Tax rate increased. Under the American Families Plan, the highest marginal tax rate for taxpayers earning more than $ 400,000 annually would increase from 37% to 39.6%. In addition, taxpayers earning more than $ 1 million would pay 39.6% capital gains tax. It is unclear how these thresholds apply to individual taxpayers versus married couples filing together.
The American Families Plan would also apply the 3.8% Medicare tax “more consistently” to those who earn more than $ 400,000 a year.
President Biden’s plan would close the “interest income gap” and require hedge fund partners to pay taxes on interest income at normal income rates.
Taxes on death. Under current law, the cost base of an asset owned by a deceased becomes its market value at the time of death. As a result, a lifelong capital gain on an estimated asset is eliminated. The American Families Plan would eliminate this “step-up-in-base” rule for capital gains greater than $ 1,000,000 per taxpayer ($ 2,500,000 for married taxpayers combined with the existing capital gain exclusion for primary residences). The fact sheet states that the plan will ultimately include safeguards for heirs who continue to run family businesses, suggesting that death or transfer by gift would result in a sale for capital gain purposes under Biden’s plan. The gain associated with a sale at the time of death is expected to be reported on a deceased person’s final income tax return.
The current version of President Biden’s proposal does not make any changes to federal estate, gift or generation transfer taxes, all of which are measured on the basis of the fair value of the assets transferred rather than profits. A capital gains tax on death could therefore exist alongside the existing transfer taxes.
Enforcement. The American Families Plan would increase reporting requirements for financial institutions and increase investment in IRS enforcement against taxpayers with incomes greater than $ 400,000.
2. The 99.5 percent law applies Senator Bernie Sanders
Annual exclusion. The current annual gift tax exemption allows any donor to give gifts of up to $ 15,000 annually to an unlimited number of recipients with no gift tax. The Sanders Plan would reduce the annual exclusion for each individual recipient to $ 10,000, with an overall limit for all recipients in a year of $ 20,000.
Transfer taxes. The current gift, estate, and GST tax exemption is $ 11.7 million. The Sanders Plan would reduce the gift tax exemption to $ 1 million and the estate and GST tax exemption to $ 3.5 million. In addition, tax rates for gifts, estates and GST would rise and tax brackets for gifts and estates would be introduced. These taxes are currently estimated at a flat rate of 40%.
Suggested gift and estate tax brackets:
|
over |
But not over |
99.5% Act |
|
$ 3,500,000 |
$ 10,000,000 |
45% |
|
$ 10,000,000 |
$ 50,000,000 |
50% |
|
$ 50,000,000 |
1,000,000,000 USD |
55% |
|
1,000,000,000 USD |
65% |
Note: The GST tax is set at the maximum estate tax rate of the federal government. Therefore, all GST taxes would be assessed at a flat rate of 65% if the GST tax were not put in parentheses.
Grantor Trusts and GRATs. New grantor trusts (trusts that are treated as the property of the person who financed them for income tax purposes) would be included in the grantor’s taxable estate at the time of death. New gifts or sales to existing grantor trusts would also be included in the grantor’s taxable estate. Older trusts would be grandfathered as long as no further contributions are made. This change would render some popular estate freezing techniques ineffective and have a significant impact on even everyday trusts such as irrevocable life insurance trusts.
The Sanders Plan would also place additional requirements on Grantor Retained Annuity Trusts (“GRATs”). A GRAT enables a grantee to shift an oversized increase in the value of funding assets to family members, often while giving gifts of little to no value for gift tax purposes. The GRAT annuity would have to be paid for a minimum of ten years, and the remaining interest would have to be a value equal to 25% of the property brought in, or $ 500,000. This requirement would eliminate the use of the “zeroed” GRAT.
Exempt GST trusts. The Sanders Plan would eliminate multigenerational “dynasty” trusts by requiring that each new trust be terminated no later than fifty years after it was established in order to be considered GST-exempt. Existing GST exempt trusts would lose their exemption status 50 years after the Effective Date.
Valuation discounts. The Sanders Plan would eliminate haircuts on “non-business assets” where the acquirer and his family members have control or majority ownership in the company. Non-business assets are assets that are not used for the active pursuit of any trade or business.
3. Ultra millionaire tax of 2021, Senator Elizabeth Warren
Senator Warren’s plan would introduce a property tax into the Internal Revenue Code. The plan would impose an annual tax of 2% on the net worth of households and trusts valued at over $ 50 million and an additional annual surcharge of 1% on households and trusts valued at over $ 1 billion.
4. Reasonable Taxes and Equity Promotion Act of 2021, Senator Chris Van Hollen
Senator Van Hollen’s plan would treat any property transferred by gift, trust, or death as if it were being sold to the acquirer at fair market value at the time of gift, death, or transfer. The exemption for such a win would be $ 1 million.
* * *
President Biden’s plan did not provide any information on the effective date of any of his tax reform proposals. The effective date of a proposal passed this year can likely be a date between the effective date and January 1, 2022. While it is possible that adopted reforms could be implemented retrospectively, such a move would be unusual.
2021 Goulston & Storrs PC. National Law Review, Volume XI, Number 132