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Tax Planning

November 08, 2021

Washington Tax Update: The Slow Crawl Toward a Reconciliation Bill

All bets are off as the House Democrats have failed time and again to reach a consensus around both the spending and the revenue raiser components of the Build Back Better reconciliation bill. Although the passage of the bipartisan Infrastructure Investment and Jobs Act by the House puts that bill on President Biden’s desk this week, Build Back Better still needs passage by both houses of Congress. As of this writing, matters are stalled once more, and the fate of numerous tax proposals affecting individuals is undecided. For now, we urge clients not to become complacent, to continue their estate planning as though the estate tax exemption amount may fall at the end of this year and to keep current on the income tax proposals to take advantage of possible short-term opportunities to save tax.

A Busy October

To recap, we saw wide swings in the tax proposals in and out of Build Back Better (the “Bill”).

The most recent proposal, the second revision by the House Rules Committee, as of November 3, includes few revenue raisers applicable to individuals. Changes will be effective, if passed, January 1, 2022, unless noted.

  • Surcharge of 5-8% additional tax on income greater than $10 million for individuals and $200,000 for trusts and estates
  • 8% net investment income tax made applicable to active income derived in the ordinary course of a trade or business of a partnership, LLC or S corporation
  • Limitations on the use of excess active business losses against other income, making current law permanent
  • Limitations on special gain preference rules for qualified small business stock; taxpayers with income greater than $400,000 are limited to a 50% exclusion
  • Application of “wash sale” rules to commodities and cryptocurrency; the 30-day rule defers recognition of some losses (effective September 13, 2021)
  • Prohibition of “back door” Roth conversions
  • Required distributions of IRAs with a value greater than $10 million (effective 2029) and prohibition of all conversions by high-income taxpayers (effective 2031)
  • Increased deduction for state and local taxes, from $10,000 to $75,000

What is no longer in the Bill might return in later negotiations:

  • Increased personal top income tax rate and capital gains rate
  • Reduced estate tax exemption from $11.7 million to $6 million
  • Changes to the taxation of grantor trusts and valuation discounts on transfers of nonbusiness assets
  • Limited deductions for income from partnerships and S corps (limited 199A deduction for qualified business income)
  • Elimination of cost basis step-up at death
  • Imposition of capital gains tax on unrealized capital appreciation at death or on making a gift
  • Prohibition of private investments by an IRA as an accredited investor

Next Steps

Negotiations are expected to continue in the House for the next two weeks as different factions of the Democratic party push for their priorities. In the end, there may be no agreement. Or, there may be no agreement until well into 2022. In any event, we want to stay fluid and flexible with respect to both estate and income tax planning.

  • While the current proposal does not reduce the estate tax exemption, putting assets into a trust for future generations can still be effective to remove future growth of those assets from your taxable estate. If you are willing and able to use all or part of your exemption but you still aren’t sure, you might choose to defer funding of a trust until closer to year-end when the tax situation is clearer.
  • The current proposal imposes a 5% and 8% surtax on irrevocable non-grantor trust income in excess of $200,000 and $500,000, respectively. Consider whether some capital gains in your trust should be accelerated into this year to minimize future taxes, at least for a period of three to four years. Discuss with your accountant what measures you might take in 2022 to send more income out to the beneficiaries who are likely taxed at a lower rate.
  • Consider completing any “back door” Roth conversions this year; these are conversions of IRAs which were funded with nondeductible contributions.

Income and estate planning is best done within a framework of goal-based wealth and investment planning. We encourage our clients to revisit their goals annually with their relationship team to forge the best path forward.


This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.