White House Tax And Spending Bill Takes Final Shape

Photo by Ana Lanza on Unsplash

Big sigh of relief!

The White House has just released the $1.75 trillion framework for its social and climate-related Build Back Better plan and clients will be relieved to hear that, as of now, it does not contain the disruptive tax, retirement or estate tax measures that they may have been fearing.

One caveat. Let’s keep in mind that this proposal has not yet been voted on and is not yet law. That means that changes are still possible as the proposal is fleshed out and works its way through both houses of Congress. But based on what has been released, we’re relieved to see that most of the painful measures that would have affected our clients have been removed from the framework.

Here’s what we believe is NOT in the bill:

  • no lowering of the gift and estate tax exemption amounts that would have made it more difficult for clients to leave a legacy for their children and families;
  • no increased reporting requirements for the IRS to track bank account transactions (this one had a lot of people stirred up!);
  • none of the rumored limitations on grantor trusts;
  • no taxes on billionaires’ unrealized capital gains (not that it would affect anyone we know, but it seemed difficult to implement and would have created an unwelcome precedent of taxation on unrealized gains);
  • limited increases in income or capital gain tax rates, except on incomes over $10 million per year;
  • no additional restrictions on contributions to IRAs, Roth IRAs, or workplace plans, or punitive withdrawals on accounts that had gotten “too big” (NOTE: this is changing as of last night’s new proposals. We are starting to see proposed limits on very large accounts. We will keep you posted).

Here’s what it DOES currently include:

  • A 15% minimum tax on corporations with more than $1 billion in profits (an estimated 200 companies), a 1% surcharge on the amount public companies spend to repurchase their shares in stock buybacks, and a 15% global minimum tax.
  • Higher taxes on higher earners, defined as people earning more than $10 million each year (the top 0.02% of earners, or an estimated 22,000 people according to the IRS). These individuals will pay 5% surtax per year, and an additional 3% more per year on modified adjusted gross income (AGI) exceeding $25 million per year. These increased rates will affect all “above the line” income items such as dividends, interest and capital gains. This would reportedly push the top federal tax rate to 45% (plus 3.8%) and the top capital gain rate to 31.8% for these individuals.
  • Income surtaxes applied to trusts, consisting of a 5% surtax on modified AGI over $200,000, and an additional 3% surtax on modified AGI over $500,000.
  • An additional expansion of the 3.8% net investment income (NII) tax on business profits for participants making over $400,000, joint filers over $500,000 and all trust and estates (regardless of income levels).
  • On the positive side, this expanded revenue will pay for new Medicare hearing aid benefits, incentives for electric vehicles, free pre-kindergarten for children, child tax credits, and expansive clean energy and climate initiatives. Other bigger ticket items, like expanded community college and paid leave, did not make it into this draft (although paid leave is making a resurgence as we write this).

The Takeaway: For all the people frantically undertaking last-minute estate and tax planning maneuvers in anticipation of higher income and estate tax rates, you’re “saved by the bell” this time. Consider this a dress rehearsal.

We expect continued pressures to raise taxes over time, so do make sure to get your basic, foundational estate planning in place and work with your financial and tax advisors to plan for a more rigorous future tax environment that may lower estate tax exemptions, and leave less income for you by sending more to the government.

We can help you evaluate potential investment and tax moves that can capture current deductions, make your portfolio more tax-diversified, and protect you in retirement from sudden changes in tax policies that could leave you vulnerable.

We’ll be bringing you more details on the Build Back Better proposal as it firms up, and will continue to share with you tax-saving moves that can benefit you and your portfolio as we approach year-end.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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