The End of Many Favorable Federal Income Tax Laws?

Green Book Proposal Would Increase Income Taxes Significantly

Our April 8, 2021 Gunster’s Client Alert described a congressional Democrat proposal that would drastically reduce the current $11.7 million lifetime exemption from estate and gift taxes to $1 million for lifetime gifts and $3.5 million for estates and make other changes that generally would be effective January 1, 2022, but with some adverse features that would become effective upon enactment as early as this year.  Other Congressional proposals would have negative implications for federal income taxes.  We also reported that President Biden proposed increases to corporate and other business income taxes.

On the heels of those proposals, the Biden administration recently released its “Green Book” budget proposal that, among other things, would increase federal income taxes for individuals, estates, and trusts, also generally effective January 1, 2022.  A summary of selected major adverse features of that proposal follow.

1. Eliminate the current income tax free basis step up for appreciated property held at death so that beneficiaries would only inherit the decedent’s lower cost basis, thereby subjecting inherent gain to income taxes when sold.  (Note that this was tried in the 1970s, but it proved so problematic and controversial that the law was repealed before it became effective).
2. Tax lifetime gifts and testamentary bequests of appreciated property, subject to an aggregate $1 million exemption.
3. Prohibit partial interest valuation discounts.  Valuation discounts currently applicable to gratuitous transfers of partial interests in property, perhaps including family businesses, may no longer be allowed.
4. Raise maximum ordinary income tax rate for high income taxpayers from the current 37% to 39.6%.
5. Retroactively impose the maximum ordinary income tax rate (as noted, proposed to be 39.6%) on long term capital gains and dividends of high earners effective late April 2021.  The current 20% maximum long term capital gains tax rate would be raised for taxpayers with adjusted gross income exceeding $1 million per year to the maximum ordinary income tax rate, it appears, from April 28, 2021 onward.
6. Tax carried interest at ordinary income tax rates for taxpayers with incomes over $400,000, rather than at the current 20% maximum long term capital gain tax rate.
7. Limit tax deferral of gain recognition on certain real estate like kind exchanges to $500,000 per year.
8. No federal estate and gift tax component in the Green Book proposal.  Notably the Green Book did not contain any federal estate and gift tax proposals, but that may signal that the Biden administration may be considering merely signing onto one or more of the existing congressional Democrat proposals drastically to decrease the current $11.7 million exemption and make other negative changes to the estate and gift tax laws.

Prospects for enactment of the Green Book proposals are uncertain at this time in large part due to the narrow control the Democrats have over the House of Representatives and Senate.  Nonetheless, the extraordinary spending to date on the COVID pandemic and other enormous federal spending proposed in pending legislation heighten concern that taxes will be raised at least to fund the interest on the borrowing needed to pay for such unprecedented federal spending.

Accordingly, our continuing recommendation to individual taxpayers who have not yet fully utilized their current $11.7 million estate and gift tax exemptions with various advanced estate planning techniques is that they consult with their estate planning advisors to consider implementing such techniques as quickly as possible before they disappear.  The same recommendation applies regarding the negative income tax features of the Green Book’s proposals.

Please direct any questions to Gunster’s Private Wealth Services practice group.