Proposed changes to the US tax code have the potential to impact individual income tax rates, corporate rates, capital gains rates and step-up, estate planning and gifting.  While we don’t know definitively what the final updates to tax policy will be, in the spirit of being informed and prepared, we’ll detail the major proposals below so that you are able to anticipate what may occur well in advance.

Note that the items below are proposals or under discussion only, and are subject to change materially in scope, definition and timing.  While it’s too early to act, it’s not too soon to be aware of potential changes for 2022.

Income Tax Rates Higher:  The highest current individual tax rate is 37%.  Under new proposals, the top rates could be increased to 39.6% for higher earners (~$450K for single filers; ~509K for joint filers).

Corporate Tax Rates Higher:  The highest current corporate tax rate is 21%.  Newly proposed top rates could be increased to 28%.

Capital Gains and Qualified Dividends Rate Change:  Capital gains and qualified dividends are taxes paid on gains when appreciated assets are sold or on dividends received. For example, if you purchase a stock for $50, hold it for longer than a year, and sell it for $150, your capital gain is $100.  You are required to pay capital gains tax on the $100 of “appreciation”.  These rates currently are quite favorable, at a top rate of 20%.  Recent proposals are for very high earners (>$1mm in adjusted gross income, single filer) to pay the highest ordinary income tax rate of 39.6%, with the potential for an extra 3.8% on net investment income for a total potential tax on gains of 43.4%.  This has been proposed with the potential for retroactive application (to April 2021).

Proposed Change in Cost Basis Step-Up:  A major change to the current policy which has been proposed is the elimination of the step-up in cost basis for calculating capital gains at death.  For example, if you have a stock portfolio with an original cost basis of $1,000,000, and it’s now worth $2,000,000, when you pass away the cost basis on your portfolio “steps-up” or adjusts upward to $2,000,000.  Your beneficiaries have the new adjusted cost basis for tax purposes, and if they liquidated the portfolio would owe tax on the difference between the liquidation value and $2,000,000.  The proposed changes for gains over $1mm for single filers (some exclusions for residences, etc.) would 1) eliminate the step-up adjustment and 2) tax the asset upon transfer, not when it is sold.  In other words, tax would be owed on unrealized capital gains based on the decedent’s original cost basis.  This last provision is low probability, given challenges in implementation and widespread impact.

Changes to the Estate and Gift Tax Exemption:   The Tax Cuts and Jobs Act (TCJA), originally passed in 2017, doubled the lifetime gift and estate tax exemption amount from $5 million to $10 million.  In 2021 these limits had increased to $11.7 million for individuals and $23.4 million for married couples.  As currently scheduled, after December 31, 2025, the increased gift and estate tax exemption limits will expire and will reduce back to $5 million (inflation adjusted).  Lowering these exemptions is currently under discussion. 

As proposed, the changes have the potential to be impactful, however final legislation is likely to be less harsh as the details of the proposals will be heavily negotiated as legislation moves through Congress.  The devil will be in the details, and once we have the final updates to the tax codes we’ll be able to help you, your tax professional and estate attorney determine the best course forward depending on your individual situation.

Disclosure:  We do not provide tax services or advice.  This article is for informational purposes only.  Please coordinate with your CPA for assistance with your individual tax situation and strategy. The information contained herein is based on sources that are believed to be reliable. Any statements nonfactual in nature herein constitute only current opinions or estimates, represent only the current judgment of the author, and are subject to change without notice.