HOUSE WAYS AND MEANS COMMITTEE ISSUES PROPOSED TAX CHANGES

On September 13, 2021, the House Ways and Means Committee released proposed tax legislation to fund the $3.5 trillion social spending package. Although provisions are subject to change as the proposal makes its way through both chambers of Congress, it is likely that some of the provisions will become law. With varied effective dates there are instances where taxpayers should act now or have a plan ready to be acted upon prior to year-end. A summary of the key provisions that may impact our clientele are as follows:

Effective upon introduction – September 13, 2021:

• Sales occurring after September 13, 2021, will be subject to a top capital gains rate of 25%, previously 20%, for individuals with taxable income greater than $400,000. A narrow exception is included for certain existing binding contracts that will close prior to year-end. This rate increase is less than the 39.6% requested by the White House but begins at a much lower income level than the $1M previously discussed.

Effective upon enactment:

• Elimination of the “Intentionally Defective Grantor Trust” (IDGTs) strategy causing all funding of new and/or existing grantor trusts to be includable in a grantor’s taxable estate. Trusts funded prior to enactment will be grandfathered under prior law.
• Removal of the favorable tax treatment for sales/transfers to trusts, except for revocable trusts, causing any gifts to a trust immediately subject to income tax.

Effective for tax years beginning after December 31, 2021:

• Top marginal tax rate increased from 37% to 39.6% for individuals with taxable income greater than $400,000 single/$450,000 MFJ.
• Adjusts the flat 21% tax rate for corporations to a graduated rate structure beginning at 18% on taxable income up to $400,000, 21% on taxable income between $400,000 and $5,000,000, and 26.5% on taxable income above $5,000,000.
• Creation of new 3% surtax on individuals with modified adjusted gross income of more than $5M and trusts with adjusted gross income of $100,000.
• Places a max limit of $400,000 single/$500,000 MFJ on the qualified business income deduction (Sec. 199A).
• Expansion of the 3.8% Net Investment Income Tax (NIIT) to include certain business income of high-income taxpayers subject to certain limitations.
• Conversion of after-tax dollars held in retirement accounts (IRA’s and qualified plans) will be prohibited making “Backdoor Roth” and the even more powerful “Mega-Backdoor Roth” strategies obsolete.
• Elimination of the increased estate and gift unified credit passed in 2017, effectively cutting the estate tax exemption in half. Adjusted for inflation the exemption for 2022 will be slightly more than $6M.
• Increase in the special valuation reduction for qualified real property used in a family farm or family business. Providing family operations with the ability to transfer $35M without being subject to estate tax, although forgoing a step-up in basis on assets.

Effective for tax years beginning after December 31, 2031:

• Elimination of Roth IRA conversions for those making more than $400,000 single/$450,000 MFJ of adjusted taxable income. A provision aimed at generating additional revenue by incentivizing Roth conversions over the next ten years.

More to come as we continue to monitor the proposal as it makes its way through Congress. A complete summary of the provisions included in the proposals can be viewed at https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf.

Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment adviser.

To ensure compliance with applicable Internal Revenue Service regulations, any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

The materials and the information are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. If you are seeking investment advice or recommendations, please contact your financial professional.