Earlier this year, Senators Chris Van Hollen (MD), Cory Booker (NJ), Bernie Sanders (VT), Sheldon Whitehouse (RI), and Elizabeth Warren (MA) proposed the Sensible Taxation and Equity Promotion (STEP) Act. The STEP Act, similar to the 99.5% Act, works in conjunction with President Joe Biden’s Tax Plan and proposes to tax any transfer of property either during lifetime or at death that has a net gain associated with the transfer.
Currently, when someone passes away with assets that have increased in value throughout their lifetime, those assets are inherited by the heirs or beneficiaries listed in the estate plan. Those heirs or beneficiaries are not required to pay capital gains on those assets that have increased in value.
The STEP Act and Capital Gains Recognition At Death
The STEP Act would create capital gains recognition at death by closing the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit these assets.
U.S. Senator Chris Van Hollen explains: “To ensure this change applies only to wealthy families, and to protect small family farms and businesses, the bill would allow all individuals to exclude up to $1 million in unrealized capital gains from this tax. For example, if someone dies holding $6 million in property for which they paid $4 million, they would only pay taxes on $1 million of that $2 million gain. If someone dies holding $3 million in property for which they paid $2 million, none of that $1 million gain would be taxable. On top of that, existing tax laws would provide an additional exclusion of up to $500,000 for personal residences, and assets held in retirement accounts would continue to not be subject to capital gains taxes. Gifts and bequests to charity would be exempt from the tax.”
How Will the STEP Act Affect You, If Passed?
The reality is that a $1 million exemption for accrued capital gains at death in today’s economy is not very much. The effects of this Act would impact far more than the ultrawealthy, but also the middle class. These impacts would be significant and should be viewed in conjunction with the 99.5% Act, proposed by Senator Bernie Sanders, and reduces the estate tax exemption to $3.5 million and lowers gift tax exemption to $1 million. This will change estate taxes substantially and might influence the effectiveness of your current plans.
We are confident that the STEP Act will not pass in its current form, however, it is a great reminder that you need to protect your legacy. Even if you didn’t have an asset protection plan before, now is an excellent time to re-evaluate your toolkit and documents with the help of an estate planning attorney.
An estate planning attorney is there to guide you in all aspects of updating your plans in light of any new possible tax changes. This year, more than ever, it is critical to have a relationship with an estate lawyer you can trust to help you protect your personal assets and align your business tax strategy.
If you have questions about these updates’ implications, you need to speak with a trust and estate attorney on the East End of Long Island about your options and create or review your personalized plan.
7 Vital Facts to Know About the STEP Act
As we mentioned in a previous blog, there are seven vital facts you must know about the STEP Act.
1. It Repeals TCPA Aspects Associated with High-Income Tax Filers
For a tax filer with over $400,000 in taxable income, the previous tax rate of 39.6% would apply. President Biden also plans to repeal one other vital aspect of the TCJA for high-income filers with a 20% deduction on qualified business income. Consequently, the wealthiest households in the U.S. would face a tax increase of around $300,000 a year, whereas most middle-class families would see a $260 per year increase. Some models estimate that the top 1% of tax filers would pay for nearly 80% of the proposed tax changes.
2. It Imposes 12.4% Social Security Payroll Tax for Wages Above $400k
Employers and employees would face a 6.2% tax on all earned income above $400,000. However, no additional Social Security tax would be imposed on those earning anywhere from $142,800 and $399,999. If you’re an employer, be prepared to update your payroll tax plans accordingly and field potential questions from your employees when they notice a higher take out of their checks.
3. It Raises the Corporate Income Tax to 28%
Before the Tax Cuts and Jobs Act (TCJA), the corporate income tax rate was 35%. That dropped in 2018 with the act’s passage down to 21%, and President Biden plans to raise it again. Any corporation that has adapted their tax strategies due to the lower rate should prepare to make potential shifts in their planning.
Are you a business owner on the East End of Long Island? Seek an asset protection lawyer on the East End of Long Island for a better understanding of how the STEP Act could impact your individual estate planning needs.
4. It Creates A Corporate Minimum Tax
Most experts believe that President Biden will increase corporations’ minimum tax. According to those who have analyzed the administration’s proposals, the top corporate tax rate will go to 28% from 21%. Notably, this is still below the typical rate for comparison in Europe; however, it would be a 33% increase from the current minimum tax for corporations. Although some experts do not predict significant changes in corporate tax tactics, speak with your tax professional about whether it is time to adapt existing plans.
5. It Establishes a Corporate Minimum Tax on Book Income
One of the most significant possible changes to taxes involves how corporations would be taxed based on their book income. If this change is enacted, it would enable corporations to consider net operating loss carryovers and tax credits, both of which can represent a monumental difference between companies’ taxable income and actual book profits.
Loss carryovers, write-offs, and special deductions account for much of the difference between book income and taxable income. If the STEP Act passes in its current form, this change would impact corporations with a minimum of $100 million in book income and carry a minimum 15% tax rate.
6. It Doubles the Tax Rate on GILTI and Impose it Country by Country
GILTI stands for Global Intangible Low-Taxed Income. The STEP Act would impose a doubled tax rate from 10.5% to 21% while also eliminating the qualified business asset investment program built into the TCJA. This provision of the act primarily relates to controlled foreign corporations and would change the worldwide average application to account for country-by-country numbers instead.
7. Temporarily Increases the Generosity of the Child Tax Credit and Dependent Credit
Thus far, President Biden has proposed two major changes: making these payments available to all parents in the form of a monthly check and increasing the amount of the child tax credit. However, because the wording reads that this is intended to last “the duration of the COVID-19 crisis,” it appears to be a temporary provision. How the administration defines “easing up” in terms of the crisis, is not clear. However, you can find similar language in the HEROES Act that only applied for the year 2020.
Estate Planning Attorney Jay Sheryll of Sheryll Law, P.C. To Present Webinar, “Don’t Trust the STEP Act”
You’re probably wondering: “Why should my hard-earned money be taken and given to the government?” “How does this affect my estate plan?”
These are questions estate planning attorney Jay Sheryll of Sheryll Law, P.C. will answer during his free webinar, “Don’t Trust the STEP Act” on Wednesday, May 19 at 3 p.m. Eastern. Sheryll offers these informative webinars in alignment with his philosophy that exceptional customer service includes education about all aspects of estate planning so that people can make informed decisions. During the webinar, he will explain how President Biden’s tax plan will affect estate tax and discuss overall tax changes and federal policies that impact estate planning.
Sheryll Law, P.C. looks forward to helping residents on the East End of Long Island to better understand how the Sensible Taxation and Equity Promotion Act affects them and what to do about it — all from the comfort and safety of their homes. The webinar is free, but registration is required. Click here to register online or contact Sheryll Law, P.C. at (631) 506-8440.
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