2021 Tax Proposals

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Several proposals are currently being considered that could significantly affect the tax landscape.



Several proposals are currently being considered that could significantly affect the tax landscape. This publication provides a summary of many of the provisions affecting individuals, as well as small business owners. 

In addition to the proposals, the American Rescue Plan was signed into law on March 11, 2021. This legislation provided additional relief for individuals through tax credits and stimulus payments, as well as extension of several tax credits for small businesses. The American Rescue Plan also extended many of the tax provisions of the CARES Act through 2021. 

White House Proposals 

American Families Plan (AFP) Proposal 

The AFP was introduced via a press release from the White House on April 28, 2021, and includes several provisions to increase federal funding of education and health care, which would be funded by tax increases. Proposals under the AFP include raising the top marginal tax rate; increasing the capital gains tax rate; applying the net investment income tax (NIIT) to active pass-through entities over certain amounts; and imposing capital gains recognition at death. AFP also proposes to limit deferrals from 1031 exchanges and eliminate capital gain treatment on carried interest.  

The proposed top marginal tax rate for individuals would increase from 37% to 39.6% and apply to income over $452,700 (single filer) and $509,300 (joint filers). Currently, the top individual tax rate of 37% applies to taxable income over $523,600 (single) and $628,300 (joint). Long-term capital gains (LTCG) and qualified dividends would be taxed as ordinary income for individual taxpayers with income over $1 million. The change in tax treatment of LTCG and qualified dividends would result in a federal LTCG tax rate of 43.4% versus 23.8% today. This includes NIIT of 3.8%, which is already applied to investment and passive business income for those earning over $200,000 (single) or $250,000 (joint). The AFP includes a proposal that would assess NIIT to active pass-through business income over $400,000.  

In addition to eliminating step up in basis at death, the AFP proposes to tax unrealized capital gains when assets are gifted or upon death of the owner. In addition, gain would be recognized by a trust, partnership or other non-corporate entity that has owned the appreciated property more than 90 years, effective December 31, 2030. Finally, distributions from such entities (except revocable trusts) would be deemed to be recognition events for taxing capital gains. There are a couple of exclusions to this provision, notably, transfers to a U.S. spouse or charity, transfers of household furnishings, individual exclusion of up to $1 million of gain (indexed for inflation) and gains on personal residences of $250,000 per individual. Tax on the appreciation of certain family-owned and operated businesses would not be due until the business was sold or ceased to be owned and operated by the family. The capital gains tax related to non-liquid appreciated assets at death would be payable over a 15-year period with a fixed interest rate.  

Finally, the AFP proposes to close certain perceived “loopholes.” First, carried interests in investment partnerships would be subject to ordinary income tax and self-employment tax, rather than treated as capital gains, if the individual has income in excess of $400,000. This would apply to carried interests in partnerships that hold substantially all the assets in securities, real estate, other partnerships, commodities, cash and derivative contracts, thus affecting hedge fund managers and owner/managers of certain private real estate funds. Second, AFP would limit capital gain deferrals from 1031 exchanges to $500,000 per individual, per year ($1 million, if filing jointly). 

Other White House Proposals

The American Jobs Plan (AJP) and Made in America Tax Plan (MATP) were both introduced March 31, 2021, and propose increases to the corporate tax rate. Corporate tax rates under the Tax Cuts and Jobs acts were reduced from a graduated tax scheme to a flat 21%. MATP proposes increasing corporate rates to 28% and will impose a 15% minimum tax on worldwide “book income.”  

Most of these proposals have been included in the president’s budget proposal, which was released May 28, 2021. These provisions would be effective January 1, 2022, except the tax rate on capital gains, which would be effective April 28, 2021 (the date that the AFP was released by the White House). The tax on capital gain of property transferred by gift or at death would be effective January 1, 2022. 

Congressional Proposals

Sensible Taxation and Equity Promotion (STEP) Act 

Senators Van Hollen, Booker, Sanders, Whitehouse and Warren introduced this bill March 29, 2021. STEP proposes to tax the appreciation of property transferred during life or at death, effective January 1, 2021. The bill contains exclusions very similar to the AFP, and the tax could be paid over 15 years if triggered by death.   

Transfers of property to a revocable trust would not be subject to the tax because these assets are includible in the grantor’s estate. Assets transferred to non-grantor trusts, however, would be subject to the transfer tax; thus, appreciation on transfers made this year would be subject to the capital gains. Trusts formed prior to 2005 would be required to recognize gains in 2026. All non-grantor trusts would have to report all of their gains every 21 years. Trusts with greater than $1 million in assets or greater than $20,000 of gross income would also be required to provide a balance sheet, income statement, list of trustees, grantors and all beneficiaries to the IRS.  

In addition to the spousal exemption are transfers to charity, qualified disability trusts and cemetery trusts. There is an exemption for a personal residence of up to $250,000 (individual) or $500,000 (married, filing jointly). Finally, STEP provides relief provisions for illiquid assets, such as farms and family businesses, where the children actively participate in running the business, allowing payments over 15 years. 

For The 99.5% Act 

Senators Sanders and Whitehouse introduced a bill entitled “For The 99.5% Act” on March 25, 2021. This bill proposes changes to the federal estate, gift and generation-skipping transfer (GST) tax rates and credits. It removes certain valuation discounts, changes requirements of Grantor Retained Annuity Trusts (GRATs), significantly modifies estate inclusion requirement for grantor trusts, reduces the effectiveness of many lifetime gifts to trusts, and limits annual exclusions amounts to trusts. The proposed effective date would be the date of enactment of the Act (i.e., the date it is signed into law).  

Tax Rates for Estates, Gifts and GST 

The Act proposes to increase the federal estate, gift and GST tax rates from the current 40% to a graduated rate of 45% of the value of an estate (or cumulative gifts) between $3.5 million and $10 million; 50% of the value of an estate (or cumulative gifts) between $10 million and $50 million; 55% of the value of an estate/gifts between $50 million and $1 billion; and 65% of the value of an estate/gifts in excess of $1 billion.  

The current combined lifetime estate, gift and GST tax exemption of $11.7 million (set to be cut in half, 1/1/2026), would be changed to an estate tax exemption of $3.5 million (indexed for inflation) and a $1 million exemption for gifts (not indexed for inflation).   

Valuation Discounts 

For The 99.5% Act proposes to diminish the use of discounts in planning when a family controls an entity. Nonbusiness assets of an entity would be valued as if they were transferred directly to the transferee without any valuation discount. Nonbusiness assets are defined as any asset that is not used in the active conduct of one or more trades or businesses.   

No discounts would apply for “lack of control” or “lack of marketability” if the transferor, the transferee, and “members of the family” of the transferor and transferee have control of the entity (by voting rights), or majority ownership interest of the entity (50% or greater). “Members of the family” is defined as any individual, ancestor of such individual, the spouse of such individual, the lineal descendant of such individual, or such individual’s spouse, or of a parent of such individual, or the spouse of any lineal descendant. Certain exceptions related to real estate activities apply where there is “material participation” (750 hours of active and continuous engagement).  

Protections for family farms would allow an estate to lower the value of farmland up to $3 million. The maximum exclusion for conservation easements would increase to $2 million. 

Grantor Trusts 

Under the bill, GRATs would be required to have terms of at least 10 years and not more than the life expectancy of the annuitant plus 10 years. Additionally, the value of the residual interest would have to be at least 25% of the value of the assets contributed to the GRAT. This would eliminate the use of zeroed-out GRATs.  

Assets transferred to grantor trusts, such as an intentionally defective grantor trust (IDGT), would be includable in the grantor’s estate, thus eliminating the effectiveness of a common gifting strategy. For existing grantor trusts, inter vivos (during life) distributions would be deemed a gift, and turning off “grantor” status would also be deemed a gift.  

Generation-Skipping Tax (GST) 

The bill would impose a new 50-year term for trusts from the date of their creation, eliminating the viability of “dynasty trusts,” which have become popular in many states that have drastically increased, or eliminated entirely, the traditional rule against perpetuities.  

Annual Exclusions  

Currently, an individual may gift $15,000 to any number of donees. The bill would limit the total amount of annual exclusion gifts by a donor/transferor to $30,000 per year. This would apply to gifts to trusts, gifts of interests in pass-through entities, and other gifts.

Planning Considerations 

While the White House proposals have not been introduced into Congress as bills, there is consistency between the budget, STEP Act and For The 99.5% Act. One issue is clear: Taxes are not going to be cut with any of these proposals. Individuals who can afford to utilize the current gift/estate/GST exemption of $11.7 million should consider using it this year. However, the risk of retroactive application of the STEP Act exists. Thus, income and wealth transfer taxes should be considered in your wealth transfer planning, and trusts should be created with maximum flexibility to decide whether to treat the transfer as a taxable gift.  

For example, a couple may consider a gift to a marital trust, which provides the spouse access to income during life and then transfers to other individuals. If structured correctly, the trustee would have until the date the gift tax return is filed (most likely October 15, 2022) to decide whether to treat the transfer as a taxable gift. If the exemption is reduced, the trustee could elect to treat the transfer as a gift to a spouse. Thus, the transfer would not be subject to gift tax or be considered a recognition event for capital gains purposes.  

Consider accelerating gifts to irrevocable life insurance trusts that require additional funding. For The 99.5% Act would adversely affect the ability to use annual exclusion gifts to fund life insurance trusts.

Business owners should consider transfers of business interests this year to avoid the risk of a reduced exemption, loss of valuation discounts and potential capital gains tax upon gift (taxed as ordinary income). Assuming a 40% combined minority and lack of liquidity discounts, an individual could transfer $19.5 million of a business today without incurring gift or income tax (assuming the full $11.7 million exemption is available). If the exemption is reduced to $3.5 million, capital gains are payable upon transfer (assuming basis is 50% of market value) and with no discount, the same gift would result in a tax bill of $11.4 million!

For more information, contact your local Comerica Wealth Advisor, comerica.com/wealthoffice.

Lisa R. Featherngill, National Director, Wealth Planning, Comerica Wealth Management

Natasha M. Davis, Senior Wealth Planning Strategist, Comerica Wealth Planning 



NOTE: IMPORTANT INFORMATION

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.

Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, N.A.; World Asset Management, Inc.; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. World Asset Management, Inc. and Comerica Securities, Inc. are federally registered investment advisors. Registrations do not imply a certain level of skill or training. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding yourspecific situation.

 

June 18, 2021