As recent proposed tax law changes are deliberated in Congress, much attention has focused on provisions impacting income taxes, estate and gift taxes, and retirement accounts. However, a number of key provisions are not currently included in the tax package. There is a chance that some or all of these could be introduced as legislation is amended.
1. Relief on the SALT cap deduction
While the Tax Cuts and Jobs Act (TCJA) reduced taxes for many taxpayers, the limit on deducting state and local taxes (SALT) to $10,000 per taxpayer negatively affected certain taxpayers in higher-taxed areas. Though not included in the original House Ways and Means Committee proposal, there is ongoing discussion among lawmakers to provide some type of relief. We believe there is a good chance that income limits will be applied if the SALT cap is increased or temporarily repealed. That is, above a certain income level, taxpayers would not benefit from the added relief from the deduction. For more insight on how relief could be applied see our post.
2. Eliminate stepped-up cost basis at death
Some lawmakers support tax code changes that address the cost basis of property transferred to heirs at death. Under current tax rules, certain appreciated assets benefit from stepped-up cost basis treatment at death. This means that the cost basis of property passing to heirs is based on the fair market value at death. Instead of targeting step-up in cost basis, the current House tax proposal calls for reducing the lifetime gift and estate exclusion beginning next year. There has been discussion of this idea among some key Democrats on the Senate Finance Committee.
According to recent reports, some specific ideas under discussion within the Senate include provisions that would:
- Require realization at death for transfers of property with untaxed gains in excess of $5 million per person ($10 million per couple)
- Establish an additional $500,000 per-couple exemption to apply for principal residences
- Offer an additional carve-out for family farms and businesses for the first $25 million in family farm property per couple (in addition to the $10 million per couple general exemption)
For more insight on options to change stepped-up cost basis at death see “Three options to change stepped-up cost basis rules.”
3. Limits to like-kind exchanges on real estate
The current tax code (IRC §1031) allows taxpayers to postpone paying capital gains taxes from real estate transactions if the proceeds are reinvested in similar real property as part of a qualifying like-kind exchange. A gain deferred in a like-kind exchange is tax deferred, but it is not tax free. The Biden administration proposed an annual deferral limit of $500,000 ($1 million for couples) on 1031 exchanges, which would expose appreciation above that limit to capital gains taxes. This provision could be added as lawmakers introduce amendments.
Numerous tax provisions could resurface
There are additional provisions that have been discussed but are not currently in the House bill. These include raising the tax rate on estates and gifts from the current maximum level of 40%, applying new income phase-outs for business owners claiming the qualified business income (QBI) deduction, and applying a term limit on dynasty trusts. The limit on dynasty trusts could prohibit wealth transfer to successive generations in perpetuity.
As with any policy debate on Capitol Hill, the situation is fluid and the future of any of these provisions is uncertain. It is very likely that many of the provisions will be amended and changed as the House debate continues. It’s important for investors to consult with their financial advisors to keep up to date on policy developments and how their individual tax and financial plans may be impacted.
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