The House Ways and Means Committee released a series of proposed changes to the tax code on Sept. 13, to provide funding for the $3.5 trillion “Build Back Better” spending plan.

While any proposed change to the federal tax code creates an amount of uncertainty, we can help guide you through these potential changes and the planning opportunities they present.

Here are 5 key proposed changes and how they could impact you:

1. Increasing the top marginal income tax rate to 39.6%
This change has been discussed since enactment of the Tax Cuts and Jobs Act of 2017, which reduced the top marginal income tax rate to 37%. The proposed change would return the highest-earning taxpayers’ rate to 39.6% and reduce the income needed to qualify for this higher rate.

Currently, the income needed to reach the top bracket of 37% is $523,601 for single taxpayers and $628,301 for taxpayers who are married filing jointly. With the proposed change, single taxpayers with an income of $400,001 or more and married filing jointly taxpayers with a combined income of $450,001 or more would fall into the top tax bracket. These changes are proposed to go into effect in 2022.

In addition, a new 3% surtax is proposed for taxpayers with incomes exceeding $5 million. Although few taxpayers will meet this threshold, certain situations, such as the sale of a business, could cause someone to qualify. For trusts, this 3% surtax will apply to income and capital gains exceeding $100,000. This surtax applies on top of the net investment income tax of 3.8%. Therefore, the highest earners may be subject to a capital gains tax rate of 31.8% and an ordinary income tax rate of 46.4%.

2. Raising the maximum long-term capital gains rate
Another major proposed change would raise the maximum capital gains rate paid by certain taxpayers from 20% to 25%; single taxpayers with taxable income exceeding $400,000, and married taxpayers filing jointly with taxable income exceeding $450,000 are subject to this possible increase.

In addition, unlike the timing for ordinary income tax brackets, the capital gains changes are proposed to be effective for all gains occurring on or after September 14, 2021. A very specific exception to this date may apply if the taxpayer meets certain criteria.

3. Reverting gift and estate tax exemptions
The proposal would also reduce the current gift and estate tax exemption by half, bringing it back to $5 million per taxpayer indexed to inflation from the current level of $11.7 million. This change was set to occur automatically in 2026 per the Tax Cuts and Jobs Act of 2017.

If your estate exceeds $5 million, it’s a good idea to revisit your estate plan.


4. Limiting the use of grantor trusts
Grantor trusts have long been used as a staple of estate planning to transfer wealth out of the grantor’s estate and to their beneficiaries while significantly reducing or eliminating estate taxes. With the proposed changes, the use of grantor trusts, such as grantor retained annuity trusts, spousal lifetime access trusts, individual life insurance trusts, intentionally defective grantor trusts and others are being significantly limited.

Under the proposal, distributions from such trusts to beneficiaries will be treated as gifts. Sales of appreciated property between the grantor and the trust will be treated as sales to a third party, thereby triggering capital gains. In addition, upon the death of the grantor, the assets of the grantor trust are included in the taxable estate of the grantor and subject to estate tax. Likewise, if a grantor trust ceases to be a grantor trust during the grantor’s lifetime, the grantor is treated as having made a taxable gift of the trust’s assets.

5. Restricting mega-sized retirement accounts
For high-income earners, the proposed changes will mean less retirement account flexibility. The proposal would prohibit Roth conversions for taxpayers with income above $400,000 ($450,000 for married filing jointly) effective in 2032. It would also prohibit any conversions of after-tax dollars held in retirement accounts such as IRAs and employer-sponsored plans such as 401(k)s beginning in 2022.

Additionally, the proposal mandates a 50% required annual distribution for those with combined retirement accounts above $10 million and 100% required distribution for those with combined retirement accounts above $20 million.

Other changes in the roughly 880-page proposal include:

• Increasing the expanded child tax care credit
• Applying wash sale rules to cryptocurrencies, foreign currencies and commodities
• Limiting family limited partnership discounts
• Changing the corporate tax rate to a graduated structure from the current 21% rate
   

Bell Bank Wealth Management is here to guide you through these changes and plan strategies to help you achieve your goals. We will continue to keep you informed of changes as they are announced and encourage you to meet with your advisors to develop a plan taking into account all potential outcomes.


Matthew J. Pierce, CFA, CFP®
SVP | Senior Wealth Management Advisor
O: 480-909-3971 | M: 480-773-2380 | mjpierce@bell.bank

<sub>Products and services offered through Bell Bank Wealth Management are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not A Deposit | Not Insured by Any Federal Government Agency

This article has been written for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This article also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.</sub>