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Sweeping Tax Reform on the Horizon - What You Need to Know

There has been an ongoing internal debate inside the Democratic party on how to move forward with a new tax plan. Democrats are tasked with solving for how to leverage tax increases to pay for the Biden administration’s budget resolution, which includes $3.5 trillion in spending for Medicare and Medicaid expansions, drug price reductions, green energy subsidies, child care subsidies, the child tax credit, paid family leave, and other progressive initiatives. Because every vote will be critical in getting tax legislation passed, Democratic lawmakers have been brainstorming compromises to Biden's original proposal that would unify the party and offer the best chance of the tax reform bill being passed. 

Democratic Senator and Chairman of the Finance Committee, Ronald Wyden, released two tax proposals last week. This week, the House Ways and Means Committee released its proposed tax changes. 

Possible Changes to the Tax Code:

•  Raising the top marginal tax rate to 39.6% starting in 2022 for individuals with taxable income of $400,000 and $450,000 for married couples

•  Increases in the LTCG rate to 25% along with a Binding Commitment Exception

•  Adding a 3-percentage-point surtax on taxpayers adjusted gross income more than $5 million

•  Sunsetting the increase in the estate/gift/GST tax exemption as of December 31, 2021

•  Forcing distributions from “MEGA IRAs” and limiting contributions once the account exceeds Threshold Amounts

•  Elimination of Roth Conversions for Married Taxpayers Earning Over $450,000 a Year

•  Eliminating discounts for lack of control for passive assets, with a carveout for family farms and businesses

•  New limits on note sales to Grantor Trusts and changes to Grantor Trust taxation

•  Changes to Valuation Adjustments Effective 1-1-2022

•  Elimination of IDGT Sales Effective 1-1-2022

•  Grandfather Rules for Existing Grantor Trusts

•  Increases in the Farm Exemption from $750,000 to $11,700,000

•  Inclusion of Grantor Trusts in a Taxable Estate

•  Taxation of Sales to Grantor Trusts just like Arms-Length Sales

•  Increasing the top cap gain rate to 25%, generally effective as of 9/13/2021

•  Changes to the QSBS once AGI Exceeds $400,000

•  Application of the Wash Sale Rules to Cryptocurrency

•  Capping the 199A deduction for individuals at $400,000 and married couples at $500,000

•  Raising the corporate tax rate to 26.5% from 21%

•  Limiting business interest deductions and taxing foreign income at higher rates

•  Increasing the holding period for carried interest from 3 to 5 years

•  Limiting deductions for conservation easements retroactive to September 2016

Regardless of which version of the Democratic proposals are accepted, if passed, if any, it will be the most significant tax overhaul since 1984 and upend many existing arrangements – possibly even retroactively. This makes it critical to meet with your estate planning attorney and financial advisors now - especially if your assets exceed $5,000,000 (single) or $10,000,000 (married), if you are a beneficiary of an irrevocable trust, or if you ever created an irrevocable trust. The estate planning team at Frost Law can help you navigate these new rules and update your estate plan as appropriate and necessary.

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