Tax Changes Remain Murky: A(nother) Tax Update

Estragon: Let's go! Vladimir: We can't. Estragon: Why not? Vladimir: We're waiting for Godot. Estragon: (despairingly) Ah!

Waiting for Godot, Act I- Samuel Beckett

Yes, “Ah!”. Tax watchers seem to have been unsuspectingly cast in Samuel Beckett’s famous existential and absurdist play, leaving many waiting and waiting. We have waited alongside many tax professionals and family business advisors, writing about the prospect of tax changes here, here, and here among other places throughout the year.

However, in what could only be described as excitement similar to Christmas morning, many rushed to tear open the U.S. House Ways and Means markup of the $3.5 trillion reconciliation bill. There were definitely surprises both big and small, and below we summarize some of the major pieces that you and your family board need to keep an especially close eye on as Godot finally approaches.

Summary Changes

BKDprovides a good summary of the House’s Tax bill changes for both corporations and individuals. While the write-up goes into more details, the changes we are watching most closely include:

Increases the top rate C Corp tax rate to 26.5% from 21% for corporations with incomes of $5 million while reducing the rate to 18% for corporations with incomes less than $400,000 (corporations with income from $400,000 to $5 million would remain at 21%).
Increases the top capital gains rate to 31.8% (25% statutory rate + 3.8% NIIT + 3% percent surtax). This proposal is lower than the 43.4% top capital gains rate proposed by the president for those with adjusted gross incomes exceeding $1 million ($500,000 married filing separately). The proposed effective date for a 25% capital gain rate is September 13, 2021.
Cuts the estate and gift tax lifetime exemption from the current inflation adjusted $10 million per person ($11.7 million in 2021) to an inflation adjusted $5 million. The proposed change would apply to estates of decedents dying and gifts made after December 31, 2021.

Numerous other changes, including limitations on Roth IRA rollovers, creating a 3% surtax on individuals at certain income thresholds, and a host of other changes exist in the reconciliation bill and are being hashed out in Congress currently.

Estate and Gift Taxes

The National Law Reviewdiscussed specifics of the reduction in the gift and estate tax exemption available to family businesses. In addition to the reduction of the exemption by 50% beginning January 1, 2022, current legislation is also targeting other estate planning tools. WealthManagement.com highlights a bevy of changes to current trust treatments as well as valuation discounts on gifts of specific entities.

Some Dodged Bullets

Randall Forsyth at Barron’s summarized some areas where the current iterations of the tax plan diverged from the original White House proposals. The top capital gains rate is expected to be well below the top individual rate as discussed previously. Additionally, the proposed elimination of the step-up in cost basis for estates, an area of concern for many multi-generation family businesses, did not make the House’s language. The $10,000 ceiling on state and local tax deductions was unchanged, which ruffled the feathers of Congressmen from high-tax states.

Something Is Rotten in the State of Denmark

Similar to Shakespeare’s Hamlet, something is in fact “rotten” in the Democrat’s respective Senate and House caucuses. Some obvious defections are highlighted below:

Senator Joe Manchin (D-WV), the nation’s most watched Senator, penned an op-ed highlighting his concerns with the current $3.5 trillion reconciliation bill. Senator Manchin has called for a more modest proposal and highlighted hesitation to numerous new taxes.
Senator Krysten Sinema (D-AZ), as well as moderate House Democrats, are sharing their own reservations as well as a desire to vote on the bi-partisan infrastructure bill first.
The Hill highlighted opening issues on the more progressive side as well, with Senator Bernie Sanders (I-VT) and Rep. Pramila Jayapal (D-WA) arguing the bill must stand at $3.5 trillion, which they view as a compromise from their initial $6 trillion goal.

We mention these political developments only to highlight one thing: the final bill is going to look different.

Conclusion

Dissimilar to Godot, the budget bill will, in fact, arrive in the next few weeks. Family business directors can prepare themselves and their businesses by checking in with their estate attorneys and financial advisors regarding their estate plans.

We provide valuation services to families seeking to optimize their estate plans. Give one of our professionals a call to discuss how we can help you in the current environment.