Proposed US Income and Estate Tax Changes

Written by Andrea Solana, CFP™

Changes to Income and Estate Tax have been discussed among Congress and the Biden Administration during 2021. On Monday, the US House Ways and Means Committee published proposed legislation which will be debated over the coming weeks. There may be some alterations to the proposals as negotiations take place within Congress, but the legislation provides a bit more clarity on the direction of travel and the intended effective dates should the legislation pass.

Below we provide a high-level summary of the key proposed changes:

• A reduction of the estate tax allowance from the current $11.7 million to $5.0 million (indexed for inflation).  The new threshold would become effective as of 1 January 2022 leaving the remaining part of the 2021 calendar year for individuals able to give away assets in excess of the reduced threshold to consider doing so. There will be no clawback for use of the increased exclusion amount ahead of the reduction.
• The proposed legislation does not mention the elimination of the cost basis uplift on assets transferred at death or any change to the 40% rate of estate. It also excludes any change to the annual gifting allowances.
• Top individual income tax rates will revert to 39.6% from the current 37% for taxable income above $400,000 for individuals and $450,000 for married couples.
• Introduction of a new 3% surcharge on individual taxable income above $5 million and on trust taxable income above $100,000.
• An increase of the long-term capital gains tax rate to 25% (from the current 20%) for individuals with a taxable income above $400,000. This new rate would become effective on transactions taking place after the date the legislation was proposed (i.e. 13th September 2021).
• Carried Interest would need to be held for 5 years as opposed to 3 years to qualify for capital gains tax rates. 
• An increase in the top corporate tax rate to 26.5% from the current 21% and a return to a graduated rate system ranging from 18% to 26.5%, depending on level of company earnings.
• Those clients considering settling Trusts as part of their gifting strategy should potentially accelerate the process. The proposed changes to Grantor Trust rules would take effect the date legislation is passed, which could be a matter of weeks.
• Trusts that have been funded prior to any change in legislation should not be affected.
• The legislation would also eliminate the ability to use discounts to fund common US trust structures, such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), and Charitable Lead Annuity Trusts (CLATs) unless the asset being gifted or sold is part of an ‘active trade or business.’

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While some of the proposed changes could be considered better than expected, some seem to be more wide reaching than expected. For anyone that has been considering gifting strategies they may like to do so with a bit more urgency.

If you would like to discuss how any of the proposed changes may impact you and determine whether any action might be suitable based on your individual circumstances, also considering any relevant UK IHT planning, you should contact your Wealth Manager.

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