Tax law adjustments and unintended penalties

Biden tax plan. US taxes are just around the corner.


The Biden government has published the Green Paper detailing what they want as a change in the way income is taxed, and capital gains in particular. Here is a brief summary of the proposed changes:

  • The highest marginal tax rate for individual income tax increases from 37% to 39.6%.
  • The highest income tax bracket for individuals starts at $ 452,700, down from $ 523,601.
  • Capital gains are taxed as normal income for taxpayers with incomes over $ 1 million.
  • Carried interest is taxed as normal income for taxpayers with incomes over $ 400,000.
  • Any transfer of property (including gifts and death) will be treated as a sale of property and capital gains will be taxed, with gains over $ 1 million being taxed at the new 39.6% rate (plus).

Transfers to spouses or charitable purposes are excluded.

The tax on illiquid assets can be paid over 15 years.

The tax on a family business is deferred as long as the family runs it.

Transfers to trusts and partnerships trigger capital gains tax.

Trusts that have existed for more than 90 years are taxed

There are no fractions of interest discounts on an asset.

There is an inheritance tax deduction for the capital gains tax paid.

  • S-Corp stockholders, partnership owners, and other taxpayers who receive onward corporate income in excess of $ 400,000 are required to pay either the net investment income tax (3.8%) for passive investors in the company or the Self Employed Contribution Act (Dec. , 4.) Pay%) if they are materially involved in the business.
  • Real estate exchanges are capped at $ 1 million per year.

The effective date of these changes is December 31, 2021, but there is some talk that the law may retroactively to the “announcement date” of December 28, 2021.

These proposed changes are a fundamental change from more than a century of tax law. As a result of the change, an increased capital gains tax will be levied in addition to any gift, inheritance or generation transfer tax due and the increase in the inheritance base will be eliminated. The assets in the estate (which are not used to pay capital gains tax and exceed $ 3.5 million) pay both capital gains and inheritance taxes.

An annual reporting requirement for trusts is also proposed, not only a balance sheet and income statement, but also a record of the trust’s activities and operations during the year when the trust has assets of more than $ 1 million or more has an income of more than $ 20,000.

What is missing in the Green Paper is the proposal to introduce gift taxes with retroactive effect from January 1, 2021, the abolition of Grantor Retained Annuity Trusts and other techniques of shared interest transfer.

What does the future hold in store?


So look for an accelerated shift in planning away from gift and inheritance tax planning to income tax planning. This has been the case since 2012, but it will dominate. Holding valued assets until death to reach an elevated base will no longer be a viable strategy. Small businesses and professional firms are changing the way they manage their income by putting more funds into retirement accounts instead of investing in the company’s equity and fewer business owners, driving up commercial rents. Installment sales are becoming increasingly popular, especially when the annual installment payment keeps the seller below the annual income tax of $ 1 million. The use of Qualified Opportunity Zone Funds, Charitable Lead Trusts, Charitable Remainder Trusts, and other alternative strategies will flourish.

All of this means planning must be done years, if not decades, before possible transactions involving businesses with illiquid assets such as agricultural land, even if the tax is paid over a 15-year period, which severely affects profitability. these shops.

Also, given the postponement of recognizing profits for family businesses, look for family members being forced to have a “significant stake” in the business and a sharp drop in M&A deals with closely held companies to avoid triggering capital gains on VAT Far from dissolving wealth concentrations, this will force further wealth concentration, but on a family basis.

Even if these proposals are not implemented, an automatic tax change is emerging. This is because the tax changes made under President Trump in 2017 will only last 10 years, meaning the laws will roll back in just five years in 2026. The proposal will have the useful effect of drawing the client’s attention to tax planning that they would otherwise be postponing too late.