Tax Increase Proposal Overview

The House Ways and Means Committee released its initial outline for tax changes over the weekend. This represents a basic framework for the tax bill it will introduce, yet it is important to remember that this is preliminary and subject to change before it ultimately becomes law. We’ll continue to monitor progress on the various provisions and will share planning opportunities when more certainty is available.

We will release a webinar with more detail around planning opportunities once the final law is passed.

Key Highlights:

Corporate income tax rate

Increased from 21% to 26.5%.

High-income individuals

• Top individual income tax rate increased to 39.6% from 37%.
• Highest tax bracket widened to include more taxpayers.
• Single filers now subject with taxable incomes above $400k (previously $524k).
• Married Filing Jointly threshold is now $450k (previously $628k).
• Estates and Trusts are now subject above $12,500 (previously $13k).
• Capital Gains Rate increased to 25% for high-income individuals. Those taxpayers subject to the 3.8% net investment income tax will see a total Federal capital gains rate of 28.8% -- a 20% increase. Note that this change would be effective as of the date of the Act’s introduction (i.e., Monday, September 13), with special transition rules for deals with binding contracts in place.
• Net Investment Income Tax (“Obamacare Surtax”) of 3.8% expanded to small business income exceeding $400k.
• Surtax of 3% imposed on income above $5 million.
• Deduction on qualified business income limited to $500k for married taxpayers filing jointly and $400k for single taxpayers.

Taxable Estates

• Lifetime exemption drops to $6 million effective January 1, 2022. We’ve known this would occur at least by January 1, 2026 as was previously established by tax law, however this advances the date by 4 years.
• Notably absent from the outline is any mention of the potential cessation of basis step up or taxing unrealized capital gains at death.
• Increases allowable valuation reduction for real property used in farming or other businesses from $750k to $11.7 million.

New Grantor Trusts

• Treats sales between grantor trusts and their deemed owners as normal asset sales.
• Restricts valuation discounts for passive investments.

High-balance retirement accounts

The House’s response to entrepreneur Peter Thiel’s $5 billion Roth IRA.

• Prohibits additional contributions to a Roth or traditional IRA if consolidated retirement account balances exceed $10 million.
• Increases Required Minimum Distributions on retirement accounts when consolidated balances exceed $10 million.
• Ends “back-door” Roth IRA conversions for single taxpayers with taxable income above $400k and married taxpayers with taxable income above $450k.
• Prohibits all employee after-tax contributions to qualified retirement plans, such as 401(k)’s, and so-called “mega-back-door” Roth IRA conversions for all income levels.
• Prohibits an IRA from holding investments only offered to accredited or qualified investors. Those that do, after a two-year transition period, will lose their IRA status.
• Limits when an IRA can invest in the beneficiary’s own business.

Entrepreneurs holding Qualified Small Business (Section 1202) Stock

Limits the favorable tax benefits afforded entrepreneurs and early-stage venture investors to a 50% exclusion rate, rather than 75% or 100%, for those earning more than $400k.

Cryptocurrency Traders

The Wash Sale rule is expanded to include commodities, currencies, and digital assets. Previously someone trading Bitcoin could realize a tax loss after a quick 30% price drop and immediately reinvest the proceeds in Bitcoin to maintain the exposure, while stock and bond investors have to wait at least 30 days to repurchase an asset previously claimed for a loss.

Balentine’s immediate takeaways

(subject to change as the legislation works through both the House and Senate):

• Complete large gifting now before the window closes. This includes creating new grantor trusts under current tax law.
• Finalize any contemplated Roth IRA conversions.