US tax rises ahead

17 September 2021

Earlier in the year President Biden laid out his far reaching plans for tax rises for corporations and high net worth American taxpayers. His majority in the Senate is wafer thin and it was always likely that some Democrats from those States with significant HNW voters would push back on the scale of some of these changes.

On September 13, the House Ways & Means Committee released draft legislation that proposes a series of tax increases which will be marked up over the coming days before commencing a journey through the full House and Senate.

Most of the proposals are in line with earlier announcements but there are some significant variances from what we heard in April. For now, the following headlines give a sense of the direction of travel:

  • The highest personal tax bracket is to move from 37% to 39.6% from January 2022.
  • The new proposal on the capital gains tax rate is to increase it from 20% to 25% but, from September 13, 2021.
  • A 3% surcharge to be imposed on high income individuals effective from 31 December 2021 (high income means $5m of adjusted gross income; $2.5m for those filing married filing separate). Trusts and estates are also proposed to suffer the surcharge on income over $100k.
  • A termination of the current $11,700,000 estate and gift tax exclusion returning it to $5m indexed for inflation.  That is likely to mean the exemption will be around $6,030,000 from January 2022.
  • Carried interest holding period for capital gains treatment to be extended out from three to five years from December 31, 2021.
  • Annual contributions to retirement plans to be prohibited where the sum of an individual’s retirement plans has reached $10m.
  • The application of the net investment income tax (NIIT) at 3.8% is proposed to be extended significantly to income derived in the ordinary course of business, this was previously a carve out not included in the sums subjected to this levy.
  • Significant changes are being proposed to trusts including:
    • Assets in grantor trusts to be included in the deemed owner of the trusts estate at death
    • Distributions from a grantor trust during life of the deemed owner to be considered completed gifts where they are made to any party other than the owner or spouse of the owner.
  • Corporation tax - the latest proposal is to increase the rate from 21% to 26.5% (watered down slightly from the original proposal of a 28% rates).

Next steps

These proposals will not become law for a little while yet so there is time for some planning considerations over the coming weeks (with perhaps the exception of capital gains where there seems some determination to fix at a higher rate from the September 13 date).

If you have any questions on how the proposals could affect your finances please contact Mark Walters or Helen Griffiths