Nearly one year into the Biden administration, the White House is looking to make big changes to tax rates and regulations, with many addressing higher earners. These changes to tax rates and regulations are part of a larger plan by the Biden administration to make investments in sectors like manufacturing, infrastructure, education, and more.
In this month’s blog, we’ll examine the changes proposed by the Biden administration and explore how that may affect American taxpayers.
Capital Gains Tax Changes
Biden and Democrats in Congress are pushing for an increase of the tax rate on capital gains from 20 to 25 percent for those making over $400,000 (single) and $450,000 (married filing jointly). This new rate plus the current 3.8 percent net investment income tax means that the top capital gains tax rate will be 28.8 percent.
The Biden administration is also looking to end the step-up in basis and to tax unrealized capital gains at death. While these are not currently reflected in the House tax plan, it is still something to keep an eye out for as time progresses.
Specifically, the current estate and gift tax exception cut-off (currently set at $11,700,000) will be set at $5,000,000 if Biden’s plan is accepted.
Grantor Trusts Changes
The Biden administration has also proposed changes to the function of grantor trusts as well. Grantor trusts are trusts where the grantor is treated as the owner for income tax reasons but is structured to be excluded for estate tax purposes. Specifically, the ability for grantor trusts to be excluded from estate taxes would be removed under the Biden plan.
We can also expect that sales between the grantor and the grantor trust will be recognition events for estate tax purposes. Apparently, these provisions will be applied to trusts established and sales to trusts implemented after the official enactment date of the new law, meaning that all prior grantor trusts and sales to grantor trusts will be treated as non-income tax events.
Lastly, valuation discounts will be eliminated for transfers of non-business assets. This would apply to minority interests and lack of marketability. Like for grantor trusts, the new provision would only apply to valuation discounts enacted after the provision is officially accepted and enacted.
Individual Income Tax Changes
Part of the proposed tax changes introduced by the House also addresses the individual income tax rate. Specifically, the top income tax rate will see a small rise from 37 percent to 39.6 percent in 2022 if this plan goes through.
Right now, the 37 percent tax rate is applied to an income of $523,000 for single filers and $628,000 for married couples. If the House plan were to go through, filers can expect the 39.6 percent rate applied at $400,000 (single) and $450,000 (married). The House is also looking to add a 3 percent surtax on those making over $5,000,000 income and over $2,500,000 for those who are single or married filing separately.
Small business owners may also be subject to a 3.8 percent tax on their individual income tax if they net more than $400,000 in pass-through income. At the moment, business owners receive a 20 percent deduction for their qualified business income, but this will be ended for those who make more than $500,000 in a joint return or $400,000 for single taxpayers.
Lastly, the House is looking to repeal the Roth conversions in individual retirement accounts and 401(k) type plans for those making over $450,000 (married jointly) or over $400,000 (single).
If you are concerned about these potential changes to the individual tax rate, don’t worry! Our team is evaluating these changes and will help you determine what the best strategy is for your unique financial situation.
Corporate Tax Changes
Not only is the House considering raising the individual income tax rate, but the corporate tax rate would also see a noteworthy adjustment as well. The Biden administration is looking to raise the corporate tax rate from 21 percent to 26.5 percent, a 5.5 percent increase. The corporate tax rate was reduced to 21 percent from 35 percent in 2017 by the Trump administration.
Stay Informed With TrinityPoint Wealth
While there is no guarantee that the proposed changes will become law, we wanted to share these proposed changes as you consider your tax and estate planning. To stay up-to-date on federal tax changes and how they will affect you, check out our blogs for regular updates or simply contact our team via phone, email, or an in-person visit. We are here for you.
This material prepared by TrinityPoint Wealth is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by TrinityPoint Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. TrinityPoint Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Materials herein were prepared by AGI Marketing. TrinityPoint Wealth and AGI Marketing are not affiliated.