We are saddened to share the passing of the Honorable John E. Dewane, retired judge and close friend of many members of the Kotz Sangster team, on Thursday, October 14th. At 81 years old, John spent several years as a vital member of our firm in addition to his impactful career serving Berrien County as a Circuit Court judge.
Recently, Congress made some significant movement towards proposed income and estate tax law changes when The House Ways and Means Committee released their proposal (“Proposal”). The Proposal is designed to be incorporated into the Democrat’s budget reconciliation bill known as the “Build America Back Better Act.”
If the Proposal is passed as is by the House and subsequently the Senate, tax rates for both individuals and corporations will increase. While the effective dates of the various proposals are still unknown, it is possible that it will be the date of the release of Proposal, the date of enactment or January 1, 2022. While we believe retroactive changes to the date of the Proposal is the least likely result and January 1, 2022 being the most likely of the effective dates, you never know what Congress will actually do and there is precedent for making any tax act changes retroactive. The key changes to consider are as follows:
Individual Income Tax: The top marginal individual income tax rate will increase to 39.6% (from 37%). This increased rate would apply to: 1) married individuals filing jointly with taxable income over $450,000; 2) heads of households with taxable income over $425,000; 3) unmarried individuals with taxable income over $400,000; 4) married individuals filing separate returns with taxable income over $225,000; and 5) estates and trusts with taxable income over $12,500. The 2.6% increase would return the top rates to those last seen in in 2017.
Retirement Contributions: Taxpayers can currently make contributions regardless of income level to retirement plans. The Proposal will prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions will apply to: 1) single taxpayers with taxable income over $400,000; 2) married taxpayers filing jointly with taxable income over $450,000; and 3) heads of households with taxable income over $425,000.
Capital Gains Tax: The Proposal will increase the 20% tax rate on capital gains to 25%. The 3.8% tax on investment income will remain in place.
Estate and Gift Tax: The federal exemption is currently $11.7 million per person during an individual’s lifetime or at their death without that money being subject to estate taxes. The Proposal would reduce this amount to about half or $6,020,000 per person. This would accelerate the effective date from the Trump tax act from January 1, 2026 back to January 1, 2022.
Lifetime Gifting Restrictions: There are also significant changes that will cause Grantor Trusts such as Intentionally Defective Irrevocable Trusts (IDITs) and Irrevocable Life Insurance Trusts (ILITs) to be taxed in the Grantor’s estate for estate tax purposes. This is a complete reversal of tax law cases for almost 60 years. These proposals are not new and have been raised by prior administrations during tax “reform” discussions, so it is difficult to predict what will actually be passed into law. The Proposal will also modify and even eliminate valuation discounts for estate and gift taxation of intra-family transfers involving passive assets. The life insurance industry will be lobbying against these changes.
There are many unknowns with the Proposal. Democratic control over both the House and Senate doesn’t mean that these items will be rubber-stamped and passed “As Is” and there will likely be significant compromises and changes to the Proposal. For estate planning purposes, the loss of Grantor Trust planning with valuation discounts would be painful. Again, this isn’t the first time it has been raised, and some of the former suggestions regarding the loss of the cost basis adjustment at death did not make it into the Proposal. It was a key component of President Biden’s budget earlier this year but received significant push back from various industries.
There are a number of options to consider, and we are ready to assist you to prepare for what appears a likely possibility that many of the above outlined changes will become law. Please contact your Kotz Sangster relationship attorney or Jeffrey Sternberg or David de Reyna if you would like to discuss these aspects further.