Pending Changes in the Proposed Tax Legislation and Potential Year End Tax Planning Opportunities
Over the course of this year, there has been much discussion about a new federal infrastructure act and the price tag associated with the act. As we have followed its progression, the proposed act expanded and contracted in scope. In its current form, the proposed “Build Back Better Act” (“BBBA”) contains several changes affecting federal income tax law.
Increase in Surtaxes
- Additional Surtaxes
- Under the proposed legislation, the 3.8% Net Investment Income Tax is expanded to include ordinary business income for single filers making more than $400,000 in taxable income and joint filers making more than $500,000 in taxable income. This surtax will also apply to taxable trusts and estates beginning on January 1, 2022.
- Beginning January 1, 2022, an additional 5% tax will apply to individual taxpayers whose Modified Adjusted Gross Income (“MAGI”) exceeds $10,000,000 or $5,000,000 if married but filing separately. Likewise, trusts and estates with income exceeding $200,000 will have to pay the additional 5% tax. The trust or estate can still deduct distributions to reduce otherwise taxable income to the trust/estate.
- In addition to the 5% surtax, individuals whose MAGI exceeds $25,000,000 will owe an additional 3% tax, and trust and estate income exceeding $500,000 will also owe the 3% tax. As before, a trust or estate may reduce its taxable income by distributing the income to beneficiaries.
- Crypto Currency
- Under existing tax law crypto currency, such as Bitcoin, are not included in the definition of “asset” as used for determining “wash” sales. Under the proposed BBBA, crypto currency will be included in the definition of “asset” and the wash sale rule will apply as of January 1, 2022. Under the “wash sale” rules, investors are prohibited from claiming losses on sales of assets if they repurchase the asset within 30 days.
Now for Some Good News!
- No Reduction in the Unified Credit Amount
- When originally proposed, the BBBA included language that would have reduced the gift and estate exemption per individual from $11.7 million per person to approximately $6 million per person. In the most recent proposed legislation, this language has been removed.
- No Increase in Personal Income Tax Rates or the Capital Gains Rate
- While discussions of increasing the capital gains rate from 20% to 25% occurred the current version of proposed legislation contains no such provisions.
- Likewise, there had been proposals to increase the highest individual tax bracket from 37% up to 39% but no such language is included in the current proposal.
- Date of Death Valuation for Capital Assets is Still Available
- Another revenue raiser that has been discussed was eliminating the tax basis “step up” for assets passing at the death of the owner. Under current law, when a person dies, his or her assets are revalued as of the date of that person’s death for subsequent transfers. Thus, on a subsequent sale of a capital asset, the tax basis for calculating gain is the date of death value of the asset.
So What Now?
- Keep Monitoring the Headlines – this Blog is based on the most recent version of proposed legislation and what Congress gives, Congress often takes away (and vice-versa)
- If You Own Crypto Currency and It Is Underwater – if you are currently in a loss position on your crypto currency you may want to talk to your tax adviser about selling and harvesting the loss to offset other gains for the year.
- Sundown (actually “Sunset”) Is Still Looming – while Congress may not reduce the gift and estate tax exemption in the BBBA, the current gift and tax exemption is scheduled to sunset (i.e. revert to $5,000,000 adjusted for inflation) on January 1, 2026, if no further legislative action occurs.
- Still Have Questions? – feel free to give us a call!
By: Alan W. Meeks, JD, LLM (Taxation)