There’s an ironclad rule for clients trying to follow proposed federal tax legislation moving through Congress: Don’t!

Most proposed tax legislation never makes it past the congressional cutting room floor, and whatever does survive the trim and tuck of the tax committee surgeons is often wildly at variance from the original. It therefore makes little sense to devote time, effort and memory cells to learning information that has a high likelihood of becoming totally irrelevant. After all, your brain is already clogged with useless information about Henry VIII’s six wives and the War of the Spanish Succession. At least that stuff might one day show up as a question on Jeopardy! But never-passed tax legislation is as valueless as your old BlackBerry charger, the key to your college dorm room, or the players that the Boston Red Sox got in exchange for trading Andrew Benintendi.

The far better approach—tried and true—is to wait until faux tax legislation becomes actual tax legislation, at which time you can pick up the new law, read it studiously, inhale deeply all the new ideas and then exhale them out in the next breath to clients and friends.

So why write this article about the pending federal tax proposals from the Biden administration? For one thing, it is just about the only thing that anyone is talking about. For another, there is probably still time to do something about it. In homage to the Titanic, you may want to consider a change in navigation before the icebergs appear.

Biden Income Tax Proposals
The White House has advanced an ambitious agenda of income tax changes targeted at U.S. corporations and individuals making more than $400,000 a year.

Several administration proposals were published in the U.S. Treasury’s “Green Book” on May 27 of this year. One was that the U.S. corporate income tax rate would increase from the current 21% to 28%. With an average state corporate income tax in the 7% to 9% range, the combined corporate tax rate would rise to 35% or higher, placing the U.S. near the top when it’s compared with other countries.

The individual income tax rate would increase under the proposals from a maximum of 37% to 39.6% for those making $400,000.

The Old-Age, Survivors and Disability Insurance (OASD) component of Social Security taxes, which currently phases out at $142,800 of wage income in 2021, would resume at $400,000 of wages (and also count pass-through income). The hospital insurance component of 2.9% would rise to 3.8% for incomes above $250,000). This makes the effective marginal federal tax rate on income 39.6% + 12.4% + 3.8% = 55.8% for income above $400,000. Add a state income tax (say the one in Massachusetts, which is 5%) and the total tax would be 60%.

The Biden administration also proposes turning death into a taxable event—meaning that the estates of taxpayers would recognize a deemed sale of all appreciated assets they hold when they die, with a corresponding deduction allowed for federal estate tax purposes.

Biden proposes limiting the tax benefit of itemized deductions to 28% for those whose income is more than $400,000, even if their marginal tax rate is (far) higher.

The administration would also tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% for people making income above $1 million. When you apply the net investment income tax (3.8%) and state capital gains tax rates (which are 13.3% in California), the effective rate could be over 50%.

Like-kind exchanges under Section 1031 of the Internal Revenue Code would be limited to $1 million of gain per year per taxpayer.

The deduction for unlimited state and local taxes (SALT), however, would be restored under the “Green Book” proposal. Meanwhile, carried interest, a common arrangement in hedge funds, would be treated as ordinary income rather than as a capital gain.

Estate And Gift Tax Proposals
The administration has decided not to push an expansion of the estate and gift tax regime, at least during its first round of tax hikes. Instead, the president is proposing what might be termed the “Canadian” alternative, which is to tax all appreciated assets held by a taxpayer on the date of his or her death as if they were sold for fair market value.

However, estate tax “reform” (i.e., hikes) is far from dead. President Biden advanced four proposals during his 2020 presidential campaign.

The first was to eliminate the step-up in tax basis for somebody’s assets when they die. The next was to lower the lifetime credit equivalent amount (for tax-exempt gift and estate transfers) from its current $11.7 million per person to $3.5 million. (The credit for couples would fall from $23.4 million to $7 million.) The third proposal was to reduce the lifetime gift tax exemption to $1 million and decouple it from the estate tax exemption.

Finally, Biden proposed increasing the estate tax rate from 40% to 45% on larger taxable estates (as a result of reductions in the estate tax and gift tax exemptions).

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