Did We Dodge a (Tax) Bullet?

The House Ways and Means committee has finally marked-up and released legislative text to amend the Internal Revenue Code. While far from desirable, many of the  problematic proposals floating around over the past year are, at least as of now, not included in the legislative text provided so far.

The bill’s highlights:

  • Increase marginal tax rates to 39.6 percent for married couples earning over $450,000 and singles earning over $400,000. This is up from today’s top marginal rate of 37 percent. The increase would be effective for tax years beginning after December 31, 2021.
  • Increase the top capital gains tax rate to 25 percent for long-term, ordinary capital gains. This is a 25 percent increase from today’s top rate of 20 percent. This increase is effective as of September 13, 2021 (the date the bill was introduced), if the bill is enacted as proposed. There are some exceptions to the effective date and application of the new rate if there is a “binding commitment” to sell property prior to the date the bill was introduced.
  • Eliminating the increase in the estate and gift tax exemption enacted under President Trump effective for estates of decedents dying and gifts after December 31, 2021. Under this proposal, the $10 million exemption from estate and gift taxes per taxpayer ($11.7 million for 2021 after the inflation adjustment is included) reverts to $5 million (to be adjusted for inflation) per taxpayer as of January 1, 2022.
  • There are a number of other provisions that will have an impact on more complex estate and gift tax transactions, including elimination of valuation discounts when transferring “passive” investment assets held within entities and major changes governing taxation of “grantor” type trusts.
  • Also included are changes to the Roth IRA conversion rules for higher income earners and a provision forcing distributions from MEGA IRAs, as well as limiting deductions for contributions to IRAs once certain thresholds are met.

As significant as these proposed changes are, many expected worse. (And that may still yet occur). Not included in the bill, amongst others, were these more draconian proposals:

  • A long-term capital gains tax rate at 39.6 percent for taxpayers with income over $1 million. Instead, a surtax of 3 percent on taxpayers with adjusted gross income exceeding $5 million was included.
  • A “mark-to-market” type estate and gift tax regime, which may have required someone (either the transferor or the recipient) to recognize gain at the time appreciated assets were transferred by gift during lifetime or at death.
  • Reduction of the estate tax exemption to $3.5 million and a limit on the exemption for gifts during lifetime to $1 million per taxpayer. This is much more severe than the reversion to the old $5 million life and death time exemption included in the Ways and Means text.
  • The return of the “Pease Amendment” that reduced the benefit of itemized deductions, as well as a new rule that would have limited the benefit of most such deductions to 26 percent for taxpayers that are in a tax bracket higher than 26 percent.

All in all, it is possible we may have dodged the higher caliber bullet behind proposals that have been surfacing these past many months. But a bullet is still a bullet, and it hurts. Yet to occur is pending tax language from the Senate, and the always messy process of reconciling the two bills. DonorsTrust will keep you posted as the process unfolds.


  • Jeff Zysik

    Jeff Zysik is COO and CFO at DonorsTrust. He is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).

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