What the ‘Build Back Better’ plan could mean for you

In December of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Only four years later, another piece of major tax legislation is expected to be enacted. Like the TCJA, proposed 2021 tax legislation would be far-reaching and only require a simple majority in the Senate.

Recently, the U.S. House Ways and Means Committee released the latest version of President Biden’s Build Back Better plan. As a proposal, it’s likely many of these measures will never see the light of day. However, savvy investors need to be aware of five key areas of the Ways and Means proposal which, sooner or later, may become paramount issues for families and institutions alike:

Corporate Taxes

The Change: Changes in the corporate tax rate impact nearly every part of American life. At present, the corporate tax rate is set at a flat 21%. Ways and Means proposes moving from a flat rate to a graduated rate, starting at 18% and capping at 26.5% at $10 million. Many experts find this proposed approach unpalatable as the nation still grapples with the pandemic. Others are relieved that it’s a more modest increase than expected.

How it Impacts You: Changes to the corporate tax rate could impact job creation and the cost of goods in the U.S. Additionally, the proposal introduces changes to the taxes on international partnerships that would make it more difficult for businesses to avoid paying U.S. taxes when operating overseas.

Capital Gains

The Change: The proposal introduces an increase to the capital gains tax, from 23.8% to 31.8% on long-term capital gains. This includes a 3.8% surtax on income over $5 million.

How it Impacts You: Investors in the process of considering long-term risk mitigation steps for their investment portfolio should pay attention to this change as it might impact their decision-making. That said, there is a large amount of ambiguity surrounding this change, and investors should speak to their financial advisers before making any decision.

Individual Taxes

The Change: Like capital gains, the proposal also increases individual tax rates to 39.8% for individuals making more than $452,700. Additionally, state and local tax (SALT) deductions would be increased from $10,000 to $40,000.

How it Impacts You: Changes in the SALT tax will impact high-income taxpayers in high-income tax states, like New York and New Jersey, allowing for greater deductions when itemizing taxes in 2022. This adjustment to the SALT tax is already planned for 2025, and this measure would speed up that timeline to be implemented in time for the 2022 tax season.

Estate & Gift Taxes

The Change: The most punitive tax code changes in the Ways and Means proposal would be visited on estate and gift taxes. The proposal would lower the estate tax exemption from $11.7 million to $5.8 million. Additionally, changes to grantor trusts may cause such trusts to be includable for estate tax purposes.

How it Impacts You: Grantor trusts are some of the most utilized vehicles for preserving inter-generational wealth. These changes would impact trusts drafted after the legislation and could significantly impact common planning techniques. Those who have or are about to begin planning their estate should pay particular attention to these changes.

Retirement Plans

The Change: The Ways and Means proposal would address retirement plans in a myriad of ways. For starters, one change may include auto-enrollment mandates for 401(k) and 403(b) plans; the goal being to increase participation. An increase to the mandatory distribution age is also on the table as is increasing the catch-up contribution amounts.

How it Impacts You: If enacted as written, these changes to U.S. retirement plans will impact current saving strategies, especially if individuals are taking advantage of retirement catch-up provisions. Additionally, several of these changes will encourage early retirement savings, allowing those savings to remain in place until age 75.

While current investors should be aware of these proposed changes, it’s difficult to make financial decisions based on legislative motions that have yet to be passed, and without knowing what – if any – aspects of the proposal might ultimately make it into the tax code. Investors should speak with their financial adviser to better understand the potential implications for their investment strategies, their retirement plans and their estate.

Malcolm “Skip” Cowen II is president and co-founder of Cornerstone Advisors Asset Management, LLC. He can be reached at (610) 694-0900. This material is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal or tax advice. For a comprehensive review of your personal situation, always consult with a tax or legal adviser.