2021 Proposed Federal Tax Law Changes: It Ain't Over 'Til It's Over. But What Should You Do Now? JUDITH A. HARRIS, ESQUIRE, LL.M (TAXATION) | EQUITY MEMBER CHAIR, ESTATE TRUST AND TAX GROUP - PA OFFICE NORRIS MCLAUGHLIN, PA
On April 28th of this year, President Biden announced his proposed changes to Federal Tax Law that include, among other things, increases to certain ordinary income and capital gain tax rates, an elimination of the basis "step-up" in excess of certain amounts, and changes to the Federal Estate and Gift Tax laws. These proposed, significant changes are by no means the only such proposals advanced by Democratic legislators—such as Senators Biden, Warren, and Van Hollen-since January, but President Biden's are, as of the writing of this article, the most recent. And he elaborated on his plan more recently, on May 28th, with the release of his proposed 2022 fiscal year budget. President Biden's proposed changes include the following, under his American Families Plan: Tax Increases: 1. Increase of the top marginal tax rate from 37% to 39.6% for taxpayers earning over $400,000 annually. 2. Increases to capital gains rates to a top rate of 39.6% (the top rate to apply to taxpayers earning over $1 million). Surprisingly, this capital gains rate increase is proposed to take effect retroactively to the date of President Biden's May 28th announcement, making careful tax planning more difficult for those with appreciated investments or other appreciated assets. 3. More "consistent" application of the 3.8% Medicare tax to those earning over $400,000 per year. The proposal does not clearly define how these income thresholds apply to single taxpayers versus married taxpayers filing separately.
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Taxes at Death: 1. Elimination of the unlimited "step-up" in cost basis of assets held at one's death, limiting it to $1 million per deceased taxpayer. The proposed $1 million limit would include any exclusion of gain on the sale of one's principal residence. Current law allows the cost basis of an asset owned by a decedent to become its date of death fair market value, thereby eliminating any lifetime capital gain on an appreciated asset. Unlike the sweeping and momentous proposal of Senator Bernie Sanders, which would reduce the Estate and Gift Tax exemption from the current $11.7 million per person to $3.5 million, restrict and reduce use of the current $15,000 per person per year annual exclusion, and overhaul the tax efficacy and restrict the use of multigenerational "Dynasty" trusts, GRATs, and Grantor Trusts, President Biden's proposal is silent as to any of these such changes. Increased IRS Enforcement: The American Families Plan would increase the resources available to IRS to pursue enforcement of tax laws against taxpayers with more than $400,000 of income. Specifically, President Biden has proposed a major expansion of the IRS that would double its enforcement staffing and allow it more latitude in combating tax avoidance and result in significant increases in the probability of audits. His proposal includes an $80 billion funding increase for IRS over the next 10 years and projects that the plan would generate about $700 billion over 10 years in net revenue. As this proposal finds its way through the legislative process on Capitol Hill during the next few or several months, what should you do to plan effectively?
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