BSMG Tax Updates 2021

The taxation parts of the HR 5376 (President Biden’s “Build Back Better Act”) have changed dramatically over the last couple of months.  This is a result of the back and forth negotiations between the “moderate Democrats” and the “progressive Democrats”.   The latest Legislative Text of the House bill targets extremely profitable corporations and extremely high income individuals.  By extremely wealthy I mean corporations and individual who are far beyond what our best producers typically deal with when selling to their wealthy “Main Street” business owner clients and their wealthy estate planning clients. 

Keep in mind that the House has not yet voted on its bill (HR 5376) and the Senate has not yet responded to whatever the House may pass before the end of the year. The Senate has not yet crafted its bill into Legislative Text because it is waiting to see what happens when the House eventually votes on its bill.  And I imagine Senators Manchin (D-WV) and Sinema (D- AZ) will have a lot to say about any Senate bill since they are the key players in the 50 Democrat-50 Republican Senate.  We will need to wait and see how the political dance between the Senate and the House turns out before the end of the year.

What remains of the taxation provisions

Here is a thumbnail sketch of what remains of the taxation provisions in the latest Legislative Text of the HR 5376 “Build Back Better Act”. 

CORPORATE TAXES

  • A 15% minimum tax on corporate profits.  This would only apply to corporations with more than 1 BILLION in annual profits.  Clearly , companies that could fit this tax profile are probably very large publicly traded corporations that have significant tax deductions and tax credits that would potentially reduce their corporate taxes down to zero under current tax law.

IRS ENFORCEMENT

  • A huge increase in hiring of thousands of new IRS agents to audit high earners, especially successful owners of S Corps and LLCs “pass-through” entities that have high incomes

PERSONAL INCOME TAXES

  • A 5% surtax on personal incomes above $10 million per year and an additional 3% surtax on personal incomes above $25 million per year
  • Close a current loophole that allow certain “pass-through” business owner taxpayers (i.e. S Corp and LLC owners) to avoid paying the extra 3.8% Net Investment Income Tax (NIIT) on their K-1 “pass-through” profits.  Under current law, the 3.8% NIIT surtax only applies to capital gains and dividends of certain high earning taxpayers and not to K-1 “pass-through” profits.
  • Increases the State and Local Tax (SALT) deduction limit from current $10,000 per year up to $ 80,000 per year.  Hard to figure out why this provision is in the bill (politics?) since it would decrease the tax bills of certain high income taxpayers.  This would especially benefit those taxpayers in states with high state income tax rates and high local property tax rates.

RETIREMENT PLANNING

  • Would impose an IRA contribution limit on high income taxpayers ($400,000 single and $450,000 married) who also have IRA account balances of $10 million and up.  In my whole career, I have never been involved with a case where an individual had an IRA balance of $10 million.
  • Would impose extra Required Minimum Distributions (RMDs) on high income taxpayers who have IRA account balances of $10 million and up.  This would force out as taxable income 50% of the excess above $10 million in the first year and the other 50% excess above $10 million in the following year.

 

Important considerations

As you can see, HR 5376 is very different than some of the proposals that were being discussed earlier this year.  But, here is the most important consideration concerning the current legislative process going on in the House and soon to be under consideration in the Senate.  The most important considerations are the current tax income , estate, gift, and corporate tax provisions that are NOT in the House bill and will probably not be included in the subsequent Senate bill (but no guarantees on this):

  • The 21% top corporate tax rate remains the law
  • Stepped up basis at death for capital assets included in the gross estate remains the law
  • The 12/31/2025 “sunset” of the current estate and gift tax exemptions remains the law (2022 exemption of $12.06 million single and $24.12 million married)
  • Valuation discounts for transfers (lifetime exemption gifts) of minority ownership interests and lack  of marketability remains in place under the guidelines of Rev. Rul. 93-12
  • The “grantor trust” income and estate tax rules remain in place including “grantor ILITs”.  Death benefits for “grantor ILITs” with future premiums due and death benefits for newly created “grantor ILITs” would remain estate tax free.
  • The $15,000 per donee gift tax annual exclusion remains the law ($16,000 gift tax annual exclusion in 2022)
  • The 40% top estate tax rate remains in place.
  • The 20% top capital gains tax rate remains the law (plus the 3.8% NIIT surtax on capital gains and dividends for certain high earners)
    • This was 25% last time. Rep. won the battle
  • The 37% top income tax rate remains in place (plus the 3.8% NIIT surtax on capital gains and dividends for certain high earners)
  • The 20% deduction for K-1 “pass-through” profits of certain S Corp and LLC owners remains in place.  This 20% deduction can reduce the top marginal tax rate on K-1 profits from 37% to 29.6% for high income S Corp and LLC owners.
  • Tax deferral of cash value growth, tax free withdrawals to basis (FIFO) and loans for non-MECs, and tax free death benefits for life insurance remains the law
  • Tax deferred growth and LIFO taxation of withdrawals for annuities remains in place
  • The indexed tax deductibility limits for IRAs and Qualified Retirement Plans (QRPs) remain in place.
  • Tax free benefits for standalone LTC products and LTC riders remains the law.