Proposed Tax Legislation Establishes Need for Income and Estate Planning

By Mark Conrad CPA, CFP®, Benjamin Trujillo, JD, LLM, Matt Schaller, MBA, CFA, CFP®, Abby Donnellan CPA, and Anna McDonald

The House Ways and Means Committee on September 12, 2021, released new details for a potential $3.5 trillion budget reconciliation bill.  Since this is merely a proposal at this point, it’s impossible to know which provisions of the bill will ultimately become law, though there are important takeaways from the Committee’s release.

High-income and high-net-worth individuals should expect a dramatic change in the tax and estate planning landscape.

Couples with estates exceeding $12 million and individuals with estates exceeding $6 million need to contact an advisor if they have not engaged in estate planning.

While we are likely a few months from a final tax overhaul, a good way to evaluate what will eventually become law is to look at some similarities between The House Ways and Means Committee plans this week and the Senate suggestions earlier this spring.

“If we look to similarities between the House and Senate, I think that’s where there is a higher likelihood of something passing,” said  Benjamin Trujillo, JD, LLM, Senior Advisor with Compardo, Wienstroer, Conrad & Janes at Moneta (CWCJ).  “While we can’t be certain about what will actually become law, the cross-over points between the bills are a great place to start. I think we can expect more clarity on this in early November.”

Until then, three important similarities have emerged.

Tax Increases For High-Income Taxpayers

Both proposals include raising the top tax rate. The new rate would affect married couples who have a taxable income over $450,000 and individuals with income over $400,000.

Capital Gains Increases

Both the House and Senate have discussed increasing capital gains taxes, likely for anyone with over $1,000,000 of income.

“An increase to the capital gains rate was initially one of President Biden’s most significant proposals in his original tax plan,” said Abby Donnellan CPA, Advisor at CWCJ. “The plan had removed the preferred capital gain rates entirely, increasing capital gain rates to a top marginal rate of 37% (before any increase to the marginal tax rate mentioned above). Long-term Capital gain rates currently top out at 20%, signifying a large potential rate increase. However, the rate proposed by The House Ways and Means Committee was 25%, an increase of only 5%, which would be a relief for a lot of taxpayers with huge, appreciated stock holdings.”

While increasing the rate to match the ordinary income rates has been discussed, it seems more likely to increase it from 20% to 25%.  This would not include the existing 3.8% net investment income tax.  Add in state taxes (where applicable) and capital gains rates can be expected to be over 30% for those making over $1,000,000.

There has also been talk of when the rate will be effective, with the possibility floated out there to make it retroactive.  While the increase does seem likely, it seems to be a very tough sell to make it retroactive, if for no other reason than the complications the IRS would have to deal with when it comes to reporting.

“For those making over $1,000,000, it would be wise to examine your existing portfolio and consider taking gains this year, where appropriate,” said Matt Schaller, MBA, CFA, CFP®, Advisor with CWCJ. “It may also make sense to shift assets that are less tax efficient into qualified accounts while keeping non-qualified accounts in more tax efficient investment vehicles.”

Charitable contributions are another way to offset capital gains.

“Individuals with a high net worth, to the extent you have large, unrealized gains in the portfolio it can be advantageous from a tax perspective to utilize a Donor Advised Fund or Family Foundation to safeguard yourself and your family from the capital gains tax,” said Partner Mark Conrad CPA, CFP®.

Corporate Taxes Will Increase

The House and Senate are also on the same page with corporate taxes.  While initial discussions centered around a 28% corporate rate, it seems that 26.5% is more likely to pass both chambers.  For reference, this is higher than the current rate of 21%, but lower than the 35% rate corporations were paying prior to the Tax Cuts and Jobs Act (TCJA).

“It will be interesting to see how the increase in corporate taxes filters through to the economy,” noted Schaller. “It will affect corporate profits, but will it do so enough to slow GDP growth?  Will companies increase prices in order to keep profitability higher, which may lead to higher inflation?  These will be important topics to watch.”

Where is the SALT Cap?

One priority left unaddressed in both the House and Senate proposals it the repeal of the cap on State And Local Tax (SALT) deductions.

“It is kind of surprising, one of the things not in either bill is the repeal of the SALT limitations,” Trujillo said.  “We expected to see them removed and they were not addressed in either bill.”

In the 2017 Tax Cuts and Jobs Act (TCJA), legislators put limitations on how much an individual could deduct for state and local taxes paid. “They capped it at $10,000,” Trujillo said. “This meant if you paid more than $10,000 on state income, real estate, or personal property taxes combined, you couldn’t deduct the amount over $10,000. We expected this would be a priority and it wasn’t in either proposal.”

One final similarity, “Both the senate and the house have some flavor of a wealth tax,” said Trujillo. “The House proposal would target people who make more than $5 million a year by applying a 3% surcharge tax.”

Compardo, Wienstroer, Conrad & Janes has significant experience guiding multi-generational families through successful wealth transfers.

“We never let taxes drive all the financial decisions we make,” Conrad said. “However, in the event you can find tax efficient strategies, it will benefit the overall portfolio and help to maintain generational wealth.”

There are a lot of proposals and opinions as to what will eventually become law, through our significant experience at CWCJ we understand it is better to plan now if you know you could be affected by these changes. If you have an estate above $6 million, or $12 million for a couple, please contact an advisor from Compardo, Wienstroer, Conrad & Janes to discuss the options you have available.

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