By: Inhyuk Yoo, Maria Pigna & William Bricker
In March 23, 2021, we addressed the most important aspects of President Biden’s proposed tax law changes. In the ensuing weeks, more details regarding the proposed tax changes were revealed including in President Biden’s April 28, 2021 address to a Joint Session of Congress.
The following list summarizes items that we discussed on March 23 and other details that have emerged. We will continue to monitor the President’s proposals and any new developments.
Previously Proposed Changes
Corporations:
Increase income tax rate from 21% to 28%.
Individuals earning over $400,000:
Top income tax rate increase from 37% to 39.6%;
Capping itemized deductions at 28% of adjusted gross income;
Eliminating the 20% deduction for pass-through income.
Individual Capital Gains Rate:
Increase capital gains tax rate from 20% to 39.6% for individual or married taxpayers earning more than $1 million.
Estate tax:
Lowering the lifetime exemption from $11.7 million to $3.5 million;
Raising the top rate from 40% to 45%;
Eliminating step-up in basis at death (When combined with an income tax rate of up to 39.6% on a sale, this can result in total federal taxes as high as 70%).
Additional Proposed Changes
Repeal Section 1031 (tax-free like-kind exchange of property) for gains over $500,000;
Permanently extend the current Section 461(l) limitation on excess business losses;
Tax “carried interests;”
Close a loophole in the application of a 3.8% Obamacare tax to ensure that all taxpayers making over $400,000 pay the same Medicare tax.
Over 10 years, $80 million of funding for the IRS, President Biden states, will raise $700 billion of additional tax revenues.
Many of the proposed changes could have a material effect on an individual’s investment planning. For example, the end of the tax-deferral for Section 1031 exchange, combined with the increased capital gains rate, may encourage real estate investors to not sell, but rather to “wait and see” if the tax law will change again. On the other hand, they might rush to sell their assets now to catch the last train, hoping that any new law is not retroactive.
We note that that there is still a great deal of uncertainty, including the following unanswered questions:
Will the effective date for any changes be prospective or retroactive?
Is it still intended to increase the estate tax rate (from the current top rate of 40%)?
Will the estate and gift rates be the same?
Will the estate and gift tax lifetime exemption (now $11.7 million) be lowered?
Will the President propose eliminating the $10,000 limit on the deduction of state and local taxes (“SALT”)?