Last fall, we told you about potential tax law changes that could occur with a shift of power in the White House and Senate after the election. Now, as we have finished the first 100 days of a new administration, we are beginning to see just how significant those changes could be. President Biden recently released the ” Made in America Tax Plan ” that focuses on corporate taxes and includes the following goals:
- Raising the corporate income tax rate from 21 percent to 28 percent.
- Enacting a 15-percent minimum tax on book income of large companies that report high profits but have little taxable income.
- Working with other countries to pursue a global minimum corporate tax rate.
- Ramping up enforcement to address corporate tax avoidance.
Regarding individual income taxes, the President has maintained his campaign pledge that if “you make less than $400,000, you won’t see one single penny in additional federal tax.” Last month, the administration clarified that this $400,000 threshold applied to families, not individuals, but did not indicate where the tax-hike threshold would be for individuals, which currently remains unclear.
With regard to estate and gift taxes, the Biden administration has not released any specific proposals. However, the two concepts getting the most traction seem to be (1) reducing the estate tax exemption amount down to $3.5 million; and (2) eliminating the step-up in basis at death, which would result in a capital gains tax being imposed at either the transfer of the asset at death or upon the subsequent sale of the asset.
In addition to the Biden administration proposals, Democrats in Congress have seized upon the opportunity to attempt to enact some of their most desired tax proposals. Of particular interest is the “For the 99.5 Percent Act” introduced by Senator Bernie Sanders. This act focuses on reforming the estate and gift tax system with the following changes:
- Reduction of the estate tax exclusion amount to $3.5 million, and reducing the gift tax exclusion amount to $1 million (these exclusions would no longer be unified).
- Addition of a progressive rate structure to the estate tax that would increase the tax rate to 45 percent up to 77 percent for estates over $3.5 million.
- Limitation of Grantor-Retained-Annuity Trusts to 10-year minimums.
- Elimination of valuation discounts for closely held entities.
- Reduction of the annual gift exclusion to $10,000 per donee and the addition of a $20,000 annual maximum per donor.
- Addition of provisions that would cause automatic estate inclusion for grantor trusts.
While some of these items may sound a bit technical, the bottom line is clear: these proposals are specifically targeted to eliminate or restrict most, if not all, of the techniques commonly used to avoid estate and gift taxes. While Senator Sanders has introduced most of these provisions before with no success, it remains unclear how likely his bill is to get passed into law now that Democrats are in complete control of the legislative process. However, since his proposed reduction of the estate tax exclusion amount to $3.5 million aligns with what we know about the Biden administration’s thinking on the issue, it is safe to assume that at least that portion of his proposals has a good chance of passing.
The positive news is that Senator Sanders’ bill includes a provision that it would not go into effect until January 1 of the year following the bill’s passage. Therefore, we do not expect any retroactive legislation on this issue this year, meaning we can continue to engage in traditional estate tax planning techniques and take advantage of the current historically high estate tax exemption amounts for the remainder of 2021.
Overall, individuals or families can still achieve significant estate and gift tax savings by being proactive this year. Contact us to see how we can help you with your estate plan.
