Negotiations between Congress and the White House have been ongoing for months to pass bills for infrastructure, social spending, and climate change. Late in the evening of November 5, the House passed a $1.2 trillion infrastructure bill that the Senate had previously passed in August, sending it to President Biden’s desk, which he signed in a bipartisan ceremony on November 15. This bill focuses on infrastructure, utilities, and broadband, including funds to upgrade ports that are currently a serious issue within our economy. The bill will be primarily funded by repurposing some unspent Covid relief funds, changing tax reporting requirements for crypto currencies, and reinstating hazardous substance superfund taxes. Negotiations continue for the future of the social spending and climate change bill called the “Build Back Better Act.” A group of political centrists have indicated they would back the bill pending a score from the Congressional Budget Office that assuages their concerns about long-term budget deficits.
If you have been following the negotiations you have probably experienced some whiplash, and you are in good company. Many estate planning attorneys and advisors had been counseling their clients in the past couple months about re-evaluating their estate plans and tax strategies because of significant changes that we believed were likely to happen but were then abruptly excluded from a watered-down proposal from the White House on October 28. Here are some of those additional revenue generators that were excluded from the latest proposal from the White House.
- Decrease the Estate and Gift Tax Exemption from $11.7 million per person to $6 million
- Increase of Long-Term Capital Gains tax top rate from 20% to 25%
- Increase top tax bracket from 37% to 39.6% (pre-2017 level)
- Inclusion of Grantor Trusts in a taxpayer’s estate
- Elimination of the Backdoor Roth IRA and the ability of high-income earners to use Roth Conversions
Scaled-Back Plan — What Was Included?
It remains to be seen what exactly will end up in the final version of the “Build Back Better Act,” but it’s clear that it will need to be paid for with additional revenue to have any chance at passing. Since the latest proposal did not include the items above, let’s put that list aside for a minute and take a look at a few of the items that remained in the latest framework released by the White House to fund the remaining $1.75 trillion package.
5% and 3% Surtax – It is not a secret that Democrats have been focusing on the wealthiest Americans to fund their spending initiatives and this certainly achieves that goal. The 5% surtax would apply to modified Adjusted Growth Income (AGI) for a married couple over $10,000,000, and trusts and estates AGI over $200,000. There is an additional 3% surtax on modified AGI that exceeds $25,000,000 for a married couple, and trusts and estates AGI over $500,000.
Corporate Minimum Tax – There has been extensive debate around a minimum tax for large corporations, defined as over $1 billion in profits. The periodic outrage directed at large companies with wealthy directors and huge profits who pay little or no tax has been bipartisan for the most part. The minimum tax would be 15% and include foreign profits to prevent U.S. companies from shifting profits overseas.
IRS Enforcement – The plan includes a provision to beef up IRS enforcement to ensure people are paying their taxes and effectively allowing the government to collect more revenue. The focus would be on Americans earning more than $400,000 a year.
Don’t Forget The SALT
One of the more controversial provisions of the 2017 Tax Cuts and Jobs Act was the SALT (State And Local Tax) deduction cap of $10,000. This change meant most taxpayers (almost 90%) now claim the standard deduction instead of itemizing, which was felt most by taxpayers in high-tax states. There has been a push by some Democrats to eliminate the cap, but the cost of eliminating may be too high so the current proposal from the House is to increase the cap to $80,000 through 2030. Negotiations are on-going, but there is reason to be optimistic about a change to the cap that would benefit many middle-class and wealthy households.
Tax Cuts And Jobs Act Sunset in 2026
Despite the latest proposal’s lack of inclusion for many of the items we have been discussing lately, we cannot forget that the Tax Cuts and Jobs Act (TCJA) that was passed in 2017 made numerous changes to personal taxes for Americans. Those changes are set to expire January 1, 2026 unless Congress extends or makes them permanent. Predicting whether that will happen is challenging right now because it will likely depend on who controls Congress at that time. Some of the earlier proposals that have been scrapped were simply an acceleration of the changes from 2026 to 2022. For example, when the calendar flips to January 2026, the Estate and Gift Tax Exemption will be rolled back to approximately $6 million per person, significantly increasing the number of Americans who are subject to the federal estate tax. Also, in 2026, the federal income tax brackets will revert to pre-2017 levels, as seen in this chart and adjusted for inflation.
|Comparative Tax Rates for Married Filing Jointly|
|2021 Rates||2017 (2026) Rates|
|$0 - 19,900||10%||$0 - 18,650||10%|
|$19,901 - 81,050||12%||$18,651 - 75,900||15%|
|$81,051 - 172,750||22%||$75,901 - 153,100||25%|
|$172,751 - 329,850||24%||$153,101 - 233,350||28%|
|$329,851 - 418,850||32%||$233,351 - 416,700||33%|
|$418,851 - 628,300||35%||$416,701 - 470,700||35%|
|$628,301 and above||37%||$470,701 and above||39.6%|
Along with this “old” tax bracket structure would be the elimination of the cap on the SALT deduction, and the reinstatement of personal exemptions. The 20% deduction on income for Sole Proprietor and S Corporation income will also be eliminated. What’s old will be new again in 2026 unless Congress acts and that remains to be seen.
The takeaway for now is to rest easy, but not too easy. Even though many of the changes we had feared would affect the estate planning and tax planning strategies for our clients have been left on the cutting room floor for now, the social spending and climate change bill is not finalized. There are more battles to come with the sunset of the personal tax cuts in the Tax Cuts and Jobs Act coming in 2026.
The Private Wealth team at First Business Bank continues to monitor the situation as it unfolds and will provide updates as we know more. Please do not hesitate to contact us with questions.