During the week of September 12th this year, news began circulating of President Biden’s proposed tax increase to offset up to $3.5 trillion that they plan to spend on the social safety net and climate policy. While it is still in the initial proposal stages, if passed, this tax increase would affect top corporations and wealthy individuals—and thus would also potentially create big changes with things such as estate and gift tax exemptions. This proposed bill would go into effect in 2022. If it sounds familiar that’s because it shares many elements of the 99.5 Percent Act proposed by Senator Bernie Sanders and Senator Sheldon Whitehouse earlier this summer—which proposed many reduced monetary thresholds involving estate and gift federal tax liabilities. Let’s take a deeper look into the details of this new tax increase proposal and what they might mean for you.
Proposed Tax Reform Details
This tax increase comes on the heels of the $3.5 trillion package that was approved back in early August 2021. To help offset the cost of that package, this tax increase would assist in funding climate change initiatives and other goals such as public education, paid leave, and addressing child poverty, to name just a few top priority items. This tax increase would raise over $2 trillion over the next decade, according to estimates made by the Center on Budget and Policy Priorities, with nearly $80 billion going to the IRS for tax enforcement and increasing revenue. Additionally, this bill would reverse components of the 2017 Republican tax law, where corporate tax rates were lowered from 35% to the current rate of 21%.
Perhaps the most major changes that would go into effect involve hikes in corporate tax rates and wealthy individual taxes. The top corporations would see a tax increase from 21% to 26.5% on over $5 million income. Individuals earning over $400,000 per year (and married couples earning $450,000 or more per year) would see an increase from 37% to 39.6%.
How This Bill Can Affect Your Business
Let’s dig deeper into the details—what does this mean if you own a business? It depends on how much your business brings in annually. If your business is small and generates less than $400,000 per year, your tax rate would be lowered to 18%. For businesses that make over $400,000—but are still under that $5 million threshold—the tax will remain at 21%. Only businesses that make more than the $5 million annual cap would see the hike. The proposal also seeks to increase the minimum tax on U.S. companies receiving foreign income; that rate would increase from 10.5% to 16.6%. Companies will also be able to use more of their foreign tax credits to help mitigate the cost of paying the higher tax.
Estate Tax Changes
If you earn less than $400,000 per year, you may think this tax reform won’t impact you. But it could if you stand to inherit a large estate or gift. Under this new bill, certain tax strategies (including grantor-retained annuity trusts, intentionally defective grantor trusts, and non-economic valuation discounts) used to avoid paying high estate taxes would now have to follow new rules. For example, the amount of time that assets must remain in a trust could be a minimum of 10 years—meaning that the tax benefit would be lost if the decedent dies before the end of that term.
As it stands, a tax rate of 40% applies to gifts and estates worth more than $11.7 million for individuals (and $23.4 million for married couples). This tax rate threshold is set to fall to roughly half those numbers in 2025, due to sunset provisions set in the 2017 Tax Cuts and Job Act.
The new plan could potentially impact many Americans who are utilizing complex trust-planning techniques to lower their estate tax liability. Under the new rules, these tactics would be even more complicated to navigate. Of course, it is always wise to consult an experienced estate planning attorney when creating and managing your trust—and now it will be even more crucial if this new tax reform is put in place.
Other Taxation Changes
Estate, corporate, and personal income won’t be the only things facing taxation changes under this proposed tax reform. Other notable changes include, but are not limited to:
- Higher taxes on certain corporate executive compensations
- Increased tax on tobacco products
- Delayed tax increase for companies with research expenses
- Deductions for labor union workers up to $250 for dues
- Local newspapers would get tax breaks for hiring journalists
How We Can Help Make Sense of It All
Of course, this tax reform is still in early stages and currently making its way through Congress—and it remains to be seen if this version of the proposal will be supported by the entire House tax-writing committee (or be heavily amended). It is in flux—as it has already been greatly reduced to 26.5% from President Biden’s initial suggested corporate rate increase of 28%. According to The New York Times, Democrats are aiming to come to a decision by the end of September. Only time will tell how this can affect your overall tax rates.
If this is making your head spin, we are here to help you navigate these potential changes. At Lowthorp, Richards, McMillan, Miller & Templeman, APC, our estate planning legal team is ready to answer all of your questions about how your estate, taxes, wealth transfers, or business will be affected if this tax increase goes into effect.
In addition to our expertise in trust, estates, and taxation law, we are also legal experts in the following areas and are here to help you with any needs you may have regarding:
- Business & Real Estate
- Agricultural & Land Use
- Personal Injury, Wrongful Death, Flood & Fire
- Business & Civil Litigation
- Family Law
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We currently operate in the tri-counties of Ventura, Santa Barbara, and San Luis Obispo. Visit our website or give us a call today at (805) 981-8555.