Last week, the House Ways and Means Committee shared its tax proposal to pay for the $3.5 Trillion Build Back Better Act (the “Act”). This article will focus on a summary of key provisions that will affect individuals, including our observations and key planning opportunities.
We recognize that tax proposals remain only proposals until they become law and negotiations will continue within Congress. Still, we appreciate your desire to stay ahead of these conversations as they evolve, especially if planning windows may close.
Below is a high-level summary of the most notable provisions. For more details including Observations and Opportunities, please see the full report here.
Estate and Gift Taxes
Current law provides each individual with an exemption of $10 million indexed for inflation. This means that each taxpayer has a combined gift and estate with separate generation-skipping transfer tax exemptions of $11.7 million as of this year. These exemptions are currently scheduled to decrease by one-half on January 1, 2026. The proposal would accelerate this time table and decrease the current exemptions by one-half as of January 1, 2022
The proposal would still allow discounts for transfers of family operating businesses, but it would eliminate discounts on transfers of publicly-traded securities. The proposal would accomplish this by requiring families to separate all transfers into (1) non-business assets that would receive no discount followed by (2) operating businesses that could be subject to valuation discount.
Current law includes a disconnect between estate and gift tax compared to income tax rules. This allows someone to move assets out of the estate while remaining the owner for income tax purposes. These types of trusts are referred to broadly as “grantor trusts”. The proposal would limit the use of grantor trusts by subjecting them to estate tax, by taxing distributions from them as gifts and by taxing sales to or exchanges between them as capital gains
Individual Income Tax Rates
Current law provides a top marginal income tax rate of 37 percent The proposal would return the top marginal income tax rate to 39.6 percent. This top rate would apply to those with modified adjusted gross income over: $450,000 for married individuals; $425,000 for heads of households; $400,000 for unmarried individuals; or $12,500 for trusts and estates.
Capital Gain Taxes
Current law applies a maximum 20 percent rate to long-term capital gains. The proposal would increase this maximum long-term capital gains rate to 25 percent for sales beginning September 13th, absent a binding contract for sales completed by year-end.
New Income Surtax
Current law does not include a specific surtax on highest taxpayer income. The proposal would change this by adding a 3 percent surtax to those with modified adjusted gross income over: $5 million for married individuals; $2.5 million for unmarried individuals; or $100,000 for estates and non-charitable trusts.
The proposal would restrict retirement accounts for all taxpayers by eliminating “back door Roth conversions” by allowing only taxable Roth conversions effective January 1, 2022. The proposal would further restrict retirement accounts for those subject to the top marginal income tax rate.
Current law provides for a flat rate of 21 percent on corporate income. The proposal would replace this with a graduated corporate income tax rate of 18 percent up to $400,000; 21 percent up to $5 million; and 26 percent thereafter. The graduated rate above would phase out for corporations with income over $10 million.
We recognize the proposal’s ultimate outcome remains uncertain. Although we have no crystal ball, we believe tax increases remain likely and only question the timing and details of these increases. We hope this overview provides you some color around targets for change and an invitation to discuss with your advisor how these changes may affect you.
The opinions and analyses expressed in this newsletter are based on RMB Capital Management, LLC's ("RMB Capital") research and professional experience, and are expressed as of the date of our mailing of this commentary. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future performance, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this commentary does not constitute legal, tax, accounting, investment, or other professional advice. This information is confidential and may not be reproduced or redistributed to any other party without the permission of RMB Capital.