Lawmakers are asking to curtail the international tax changes included in the House Ways and Means Committee portion of a sweeping tax and spending bill written last month. This plan included increasing the minimum tax on overseas earnings for U.S. companies to 16.56%, from 10.5%. In a letter to Speaker Pelosi, Tom O’Halleran of Arizona, Henry Cuellar of Texas, and Lou Correa of California, agree that the U.S. needs to not make its move before other global legislations implement a new Global Intangible Low-Taxed Income (GILTI) regime. They also do not want the U.S. to be responsible for new rules such as country-by-country regime. Lawmakers believe that the new legislations in the Ways and Means draft could allow other countries to take advantage of them, which may cause harm to U.S. companies.

Differing arguments. While the broad outline of the agreement has the backing of nearly 140 countries worldwide, the technical details still need to be written. The global corporate tax deal, endorsed by finance ministers from the Group of 20 nations this week, calls for a 15% minimum but allows countries to have higher rates. Eliminating the international measures of the Democrats’ tax plan would scale back the revenue that lawmakers
are hoping to use to fund a major expansion in domestic social programs. The GILTI rate increase and related international changes would raise roughly $300 billion in new tax revenue, according to estimates from the Joint Committee on Taxation.

By excluding international tax changes, there is a risk of not being able to pass a higher global minimum tax in the future for the Democrats because they may not control Congress after the 2022 midterm election. House Ways and Means Committee Chair, Richard Neal, has made the opposite argument to that of the three moderates — saying that having a high-level international agreement gives the U.S. enough certainty to go forward with its own plans. Many Republicans have said they oppose increasing the offshore rate.

Neal’s proposal for a 16.56% rate is a pared-back version of Biden’s earlier tax plan, which called for a 21% rate. Democrats are hoping to pass a multi-trillion-dollar tax and spending bill by the end of the year. The bill is largely funded by tax increases on corporations and the wealthy. Narrow margins in both chambers mean that Democrats need the votes of all their caucus members in the Senate and can only afford to lose three in the House.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

President Joe Biden recently conceded that lawmakers will need to scale back the economic agenda to get it enacted. This means that Democrats are now at risk of settling for a less generous expansion of the state and local tax deduction than they previously hoped. In a closed-door meeting with House Democrats, Biden said the cost of the tax-and-social-spending package could potentially end up as a range around $2 trillion, down from a previously planned $3.5 trillion top-line figure. this means lawmakers will likely have to decrease the cost of nearly every spending program and tax credit in the legislation, including a planned increase in the state and local tax, or SALT, write-off.

The Joint Committee on Taxation, Congress’s nonpartisan scorekeeper, estimates that a single-year repeal would cost nearly $89 billion, or $178 billion for two years. Democrats advocating for a bigger SALT deduction had been pushing for a two-year repeal of the $10,000 cap on the tax break. This costly tax break that largely benefits high earners in New York, California and New Jersey is likely to pit lawmakers in both chambers who want to repeal the cap against progressives who are advocating to keep their preferred programs in the bill, including free community college tuition and funds for childcare and climate-related spending.

Negotiations loom. Representative Jimmy Gomez believes that it’s likely that SALT changes will be in the final bill, but lawmakers must negotiate the broader spending totals to figure out how much money can be spent on the move. With Biden’s comments to Democrats to greatly reduce the amount of spending on education, climate programs and health care in the package, Democrats set off a race to figure out how to salvage their preferred proposals.Some options for scaled-back SALT-cap changes include repealing the $10,000 cap for a single year instead of two, raising the deduction limit, or putting income restrictions on who can claim the write-off.

Representative Tom Suozzi, leader of the effort to repeal the SALT cap, believes that Biden’s tax and spending bill will pass with a SALT-cap repeal embedded within.

House Ways and Means Chairman Richard Neal has been responsible for finding a solution that satisfies both the SALT-break advocates and the progressives. Though he is still working on the specifics, Neal pledges to include SALT changes in a final bill.

Talley’s team of tax professionals provides comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The tax plan taking shape in Congress will erase the long-standing benefit of keeping life insurance in certain trusts, by making its value subject to the 40% estate tax when the policy owner passes away. This is a tremendous change since the trusts and their assets are not currently subject to the levy. Many advisors are still suggesting that their clients splurge on life insurance. This is because advisors believe that by pre-paying a lifetime’s worth of annual premiums by January 1st, before the new curb would go into effect if approved, individuals may be able to preserve the trust’s lucrative tax benefits.


Crisis Stage. The blow to life insurance in trusts, a bread-and-butter wealth preservation strategy for decades, is one of many proposals in the emerging tax bill that takes aim at the wealthy to finance President Joe Biden’s $3.5 trillion social spending plan. The draft bill plans to raise the top individual rate to 39.8% and bump up the top capital gains rate to 28.8%. It will tax capital gains at the top ordinary rate once income hits $1 million as well as crack down on large retirement accounts and end backdoor Roth conversions. The Bill will also kill the use of grantor trusts, whether they do or do not contain life insurance. Currently, if an individual owned a $3 million home, had $7 million in retirement accounts, and had $4 million not in a trust, $2.3 million of that $14 million estate would incur the 40% estate tax, which is about $920,000. Now if it is assumed that the insurance policy is in a grantor trust, the $920,000 would instead be left to heirs. These types of savings will no longer be possible if the proposal passes.


A major impediment. Financial advisors and estate lawyers are upset with the proposal because it is common for life insurance to be held in a widely used type of trust called a grantor trust, in which the grantor retains control and pays income tax on its gains. Many benefits of these trusts include intentionally defective grantor trusts, or IDGTs, and grantor retained annuity trusts, or GRATs. Advisors say that most irrevocable life insurance trusts, or ILITs, are set up as grantor trusts, so they would be hit by the curb, too.


In obscure language, the proposal states that any assets contributed to grantor trusts come 2022 would become part of the grantor’s estate for estate tax purposes. The issue with this is that under the plan, a policyholder who pays their annual premiums for a policy that is held in a trust would be “contributing assets,” thus making the trust subject to the 40% estate levy. Wealthy individuals who want to create a future trust for their life insurance could not make their spouse a beneficiary without subjecting the trust to estate tax as well. This is due to it automatically being a grantor trust and thus would have to pay estate tax under the proposal.


The solution becomes the problem. The proposal has the potential to upend retirement planning. The idea of pre-paying premiums revolves around using outside funds, not the money inside the trust, as the latter would get caught by the proposed curb. Many are advising clients to pre-fund their premiums now by contributing cash or other assets before the new law passes so that no additional outlays are required to pay future premiums.


Flying blind. The proposed curb would hit not just the very wealthy. Many families have a life insurance policy that is often their trust’s single largest asset. For example, a person might have a net worth under the estate tax threshold but also a large life insurance policy to care for their family if they die prematurely and their income grinds to a halt. This means that when the insurance death benefit is paid, the decedent’s total assets can exceed the estate tax exemption.


One solution might involve “decanting” a grantor trust. This strategy involves “pouring” a trust’s assets into a new trust. Or a trust could pay the insurance premiums through so-called split dollar arrangements, which are common with wealthy executives. It could be set up so that beneficiaries other than a spouse would have to approve any distributions out of the trust to the spouse, but some fear that it could cause family rifts and may have gift tax implications for kids.


Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

While most financial advisors know that the proposed tax increases will prevent affluent investors from using trusts to pass on major wealth to their heirs, something that many, and even estate planners do not know, is that there is a separate threat to investors who use trusts to move assets out of their estate free of taxes. While the threat does not come from Congressional tax writers, instead, it comes via a nearly unnoticed sentence in an obscure Treasury Department document released by the agency early last month. In a little-noticed remark in the agency’s priority plan, the Treasury is looking at whether the IRS could “claw back” taxes on gifts that investors have made under the higher estate and gift tax exemption levels in place since 2018. The recapture would begin once those higher thresholds expire come 2026.

The Treasury item is almost completely unknown in the financial planning and wealth management industry. The decision to target sophisticated moves by the wealthy is the latest blow to tax strategies used by affluent Americans to minimize their tax bills and pass on legacies to heirs. If it becomes the rule, millions of taxpayers could face sudden outsize tax bills.

Squeeze on the Wealthy. The claw back would interact with a provision in the draft tax bill coming from the House of Representatives. That provision would not extend the higher exemptions for estate and gift taxes, instead reversing them by 2026. It would also put an end to backdoor Roth conversions. The emerging bill is now mired in a fresh fight with Republicans over debt limits. The 2017 Republican tax-code overhaul nearly doubled the lifetime exemptions to historic highs. The 2017 law said that come 2026, the limits would revert to their earlier levels, with extra for inflation, unless extended. The current draft tax bill makes clear that extension will not happen.

Clawing back the anti-claw back rule. When the exemptions were doubled nearly four years ago, it spawned a frenzy of estate planning with trusts for rich investors. It also raised a question: What would happen if someone transferred assets to the next generation while the higher exemption is in place, but then died in 2026 or later when the double threshold would no longer be in place?

Treasury appeared to answer that question in November 2019. It said that for people who give assets into trusts for their children during the years of the higher thresholds but die after those levels shrink back, it would not “claw back” from their estate any taxes on amounts transferred above the smaller thresholds. The amounts would be “locked in.”

The Treasury’s priority plan released on Sept. 9 appears to signal that an anti-abuse provision is in the works. One sentence of the plan said that it would examine whether a November 2019 rule saying no claw backs would take place would be revisited. Treasury’s plan is an outline of the top tax issues it plans to focus on over the 12 months beginning in October when the government’s next fiscal year begins.

Targeting ‘have your cake and eat it, too.’ The Treasury plans to target lifetime gifts that would use the donor’s gift tax basic exclusion amount, lifetime exclusion, while at the same time being designed so that the donor retains a beneficial interest in the gifted property. A classic example of this would be a grantor retained income trust, or GRIT. In that type of trust, the grantor transfers assets to the trust, paying taxes on it, but also keeps an income stream from the gifted property. The Internal Revenue Service has flagged trusts that give the appearance that a person is giving up control of their assets and money when they still control how the money and assets are used as potentially abusive.

‘Killing’ Grantor Trusts. The Treasury’s consideration of whether gifts that are includible in the gross estate should be exempted from the anti-claw back rule comes as lawmakers consider other curbs to trusts. The draft House bill would prevent people from using grantor trusts. Specifically, it would treat sales between grantor trusts and their owner as a sale to a third party which means it will be taxable. The measures would only apply to future trusts and future transfers.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Many wealthy Americans are scrambling for solutions to reduce the effect of the tax hike Democrats are planning, and Wall Street individuals believe they have found the answer. It’s a niche strategy called private placement life insurance, or PPLI. Many advisors to the top 0.1% say that PPLI is dominating conversations with their clients. Although, the threat of higher taxes isn’t the only factor sparking interest in PPLI. Many noticed that there was a little change in U.S. insurance law at the end of 2020. This change makes the PPLI more powerful since there is competition among insurance carriers which allows many advisory firms to give rich investors more flexibility, lower costs, and a wider choice of products on PPLI platforms. Perks of its policies strike at the heart of Biden’s plans to get the very wealthy to pay more taxes on their investments. There are two major benefits of assets being held in a PPLI policy. The first is that they escape taxes. The other is that when a policyholder dies, the PPLI’s contents are inherited tax-free. Although more assets are flowing into the PPLI strategy, there are still trillions of dollars held in portfolios belonging to the richest Americans.

There are still drawbacks to PPLI policies. Once assets are inside a PPLI, they cannot be taken out without a big tax bill, though they can be borrowed against or rolled into another insurance product. The IRS rules also require policyholders to give up day-to-day control of their PPLI’s investment choices, and the portfolio needs to be diversified in particular ways.

This tool can be combined with other strategies as well. Family offices, as an example, can buy PPLI policies inside dynasty trusts. Dynasty trusts are vehicles that let multiple generations of wealthy heirs avoid estate tax. To get the most out of PPLI, advisers recommend trying to stuff as much money into a PPLI while paying as little as possible in insurance costs.

The bare minimum you’ll need to start a PPLI policy is about $2 million, although it is very common to have at least $5 million into the strategy. Withdrawing money from a PPLI while you’re still alive is taxable, so you should only deploy money that you’re sure you’ll never need.

A COVID-relief law signed by Former President Trump in December makes PPLI even more attractive. This package included a provision that changes the interest rate assumptions on life insurance policies. While this change was to tweak ordinary life insurance products, it has made it possible for the wealthy to put more money into a PPLI policy while paying less to an insurance carrier for life coverage. Even as PPLI’s popularity has spread, it’s primarily pitched to clients as a place to put investments, like hedge funds or credit products. In order to comply with rules, PPLI assets need to go in a separate account that clients technically don’t have any input on. Although many clients choose their advisor to manage the fund and set goals for how they want it invested.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

In Washington, Senior House representatives are working together to create a draft proposal that could potentially raise $2.9 trillion to pay for most of President Biden’s expansion of the social safety net. They propose raising the corporate tax rate to 26.5 percent for the richest businesses and imposing an additional surtax on individuals who make more than $5 million. This plan is a critical step for advancing the $3.5 trillion package. While it is unclear if the entire House tax-writing committee supports the proposal, it suggests plans to undo key components of the 2017 Republican tax law. But the revenue provisions outlined fall short of fully financing the entire package the Democrats are putting together. People briefed on the details cautioned that the plan was still in flux. The committee is scheduled to convene to continue work on the legislation.

Infrastructure Bill outline highlights:

  • $1 trillion package passed on August 10th, which capped weeks of intense negations and debates over the largest federal investment in the nation’s public works system over more than a decade.
  • The final tally in the Senate was 69 for and 30 against. This legislation, which still must pass the House, would touch nearly every facet of the American economy, and fortify the nation’s response to the warming of the planet.
  • The bipartisan plan focuses spending on transportation, utilities, and pollution cleanup.
  • About $110 billion would go to roads, bridges, and other transportation projects; $25 billion for airports; and $66 billion for railways.
  • Senators have also included $65 billion meant to connect hard-to-reach rural communities to high-speed internet and help sign up low-income city dwellers who cannot afford it, and $8 billion for Western water infrastructure.
  • Roughly $21 billion would go to cleaning up abandoned wells and mines, and Superfund sites.

The proposal would raise the corporate tax rate to 26.5 percent from 21 percent for businesses that report more than $5 million in income. The corporate tax rate would be lowered to 18 percent for small businesses that make less than $400,000 and remain at 21 percent for all other businesses. While the president originally wanted to raise the corporate tax to 28 percent, both parties have resisted. To help raise the $900 billion from taxes on corporations, congress has suggested additional changes to the tax code to push the minimum taxes for corporate income as well as crack down on multinational companies shifting profits to tax havens.

Representatives are also considering an increase to the top marginal income tax rate to 39.6 percent from 37 percent for households that report taxable income over $450,000 and for unmarried individuals who report more than $400,000. As for those who make more than $5 million, the proposal would impose a 3 percent surtax, which is expected to raise $127 billion. It also increases the top tax rate for capital gains — the proceeds from selling an asset like a boat or stocks — to 25 percent from 20 percent. This would provide about $80 billion over the next decade for the IRS to beef up tax enforcement, which would raise about $200 billion.

While the draft outline adhered to Mr. Biden’s pledge to avoid raising taxes on Americans who make less than $400,000, it suggests increasing the tax rate for tobacco products and imposing a tax on other products that use nicotine. This would bring in an estimated $96 billion. The document also outlines the possible inclusion of drug pricing provisions and changes in tax rules to treat cryptocurrency the same as other financial instruments.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Officials in some of the world’s largest cities want to tax the empty homes of the rich as policymakers struggle to control an affordable housing crunch. By 2022, Los Angeles is planning to put a vacant house tax on the ballot in the face of a mounting housing crisis. In Hong Kong, officials consider taxing condo developers to deter them from keeping new units. Barcelona has already threatened to seize empty apartments from landlords to convert them into affordable rentals. Back in 2017, Paris officials tripled the taxes on second homes.

Authorities are deciding to take drastic measures to not only discourage people from parking cash into homes instead of living in them but to also stop distortion of supply-and-demand metrics with properties off the market. Lawmakers say that trends are depleting inventory which makes it difficult for low-to middle-income renters and homebuyers. Lawmakers hope that taxes will fund affordable housing efforts or push landlords, as well as the wealthy, to put their properties on the market.

While in theory this change may make a difference, many aren’t convinced that it will work. Brendan Coates, economics policy program director at Think Tank Grattan Institute located in Melbourne, believes that it will be a distraction from the main issue. Many economists say factors such as record-low interest rates, population growth, an imbalance between supply and demand, as well as a lack of affordable housing construction have a much bigger impact. There are three main reasons why many economists believe that adding another tax won’t work.

  1. No Inventory. Vancouver implemented a vacancy tax of 1% of a property’s assessed value due to a rental market with near-zero inventory. While landlords in the city were able to convert more than 5,000 existing condominium units into long-term rentals, the actual number was not so impressive. Vancouver originally expected there to be more than 10,000 homes that were empty or “under-utilized. In practice, the city identified only 2,538 units that fit that description. That number fell by 25% over the next two years. There has been no notable improvement in the availability of condos for rent. This can be seen by the vacancy rate in the Vancouver metropolitan area, which was at 0.8% in 2020; 0.3% higher than in 2019. While the city had hoped the tax would push vacancy rates as high as 5%, any new stock was quickly absorbed.

  2. No enforcement. Looking at Melbourne, middle-class families are finding themselves priced out after a two-decade-long housing boom. Across Australia, the number of low-income households in rental stress has more than doubled in that time as well. Melbourne’s tax was meant to increase for-sale and rental inventory, but few have had to pony up. For 2019, Melbourne estimated a gain of A$80 million over the next four years. Officials soon realized that this was not going to happen after they had taxed 587 properties and only raised A$6.2 million. This was a huge disappointment to advocates. Karl Fitzgerald, director of research at Prosper Australia, had estimated there were 24,042 properties in Melbourne that consumed zero liters of water a day, meaning they couldn’t have been occupied, but only 587 properties were taxed. He now believes that taxing both land and property regardless of use each year might be a simpler way to discourage speculative buying and encourage developers and owners to make more properties available for use.

  3. Moral Optics. Los Angeles-based Strategic Actions for a Just Economy published a report last year arguing that the city should implement its own vacant-homes tax. Arguing that while the tax itself wouldn’t be enough to turn the situation around and taking into account that vacancy rates are higher for more expensive properties, such legislation would send an important message. For some cities, it’s not about money or redistribution, but the political and moral optics of not having more homes than you need while others struggle to even hold onto one. In Vancouver, tripling the tax from 1% to 3% since it launched sends an even stronger message that homes are for people, not speculation.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

As part of an unprecedented effort to recoup lost income-tax revenue, New York tax authorities are targeting individuals earning as little as $100,000 a year who claim to have left the state during the pandemic. Since the end of the filing season, thousands of notices from the New York Tax and Finance Department have landed in taxpayers’ mailboxes. Normally, it would take $1 million a year in income to trigger heightened scrutiny, but many people who are earning far less are receiving letters asking them to verify residency status and personal income allocation to determine whether they owe more to the state than claimed on their 2020 earnings. According to the state agency, their tax authorities have sent out more than 149,000 audit notices. This also includes computerized letters, or desk audits.

While New York is known to be an aggressive tax collector due to its history of relying on field audits of high-net-worth individuals, its latest enforcement efforts are highly unusual. This is due to New York tax authorities sending notices to clients with salaries between $100,000 and $300,000 a year within weeks of filing their state returns. The triggering events for such audits appear to be if a taxpayer indicated that they only lived in the state part of the year or allocated less income to New York than prior years.

Tax Enforcer. New York taxes the income of nonresidents if they work or perform services inside the state. This includes wages paid to a commuter who worked from home out of necessity during the pandemic. Some commuters, like those in neighboring New Jersey, will receive a credit on their New Jersey state income tax to avoid double taxation. Some have challenged that assertion, arguing that New York doesn’t have a right to tax income earned outside its borders.

Desk Audits. Tax experts say the pandemic has only accelerated an existing enforcement priority for the tax department over the last several months. Across the country, Americans fled dense major cities like New York during the height of the pandemic either to second homes or to temporarily live with family, while some left altogether to the suburbs in search of more space. Desk audits are computer-generated queries that are sent automatically to individual filers when the system picks up an anomaly in a tax return from prior years. A field audit consists of an individual auditor being assigned to deeply vet a taxpayer’s whereabouts for an entire tax year. In desk audits, taxpayers are being asked to fill out a non-resident questionnaire collecting preliminary information like when the individual last filed a state tax return, when they became a non-resident, and how many days they worked in New York.

$10,000 tax bill. Many have been surprised by these unexpected tax bills. Taxpayers have been receiving a $10,000 tax bill with their desk audit notice. This is because some believe that they can allocate a smaller percentage of income to New York compared to the previous year. Many taxpayers who are unable to prove their whereabouts are forced to pay state income tax even if they are a non-resident.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Earlier this month, the IRS issued a safe harbor that allows employers to exclude certain amounts received from pandemic economic relief programs when determining whether they qualify for the Employee Retention Credit (ERC) based on a decline in gross receipts. Amounts that can be excluded from the calculation of gross receipts include:

  • Forgiveness of Paycheck Protection Program (PPP) loans
  • Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
  • Restaurant Revitalization Fund grants under the American Rescue Plan

It is important to calculate gross receipts since an employer may be eligible for the ERC if the gross receipts for a calendar quarter declines by a certain percentage compared to a prior calendar quarter. While the amounts received from other pandemic relief programs above are excluded from an employer’s gross income, they have to be included in its gross receipts, unless safe harbor is used. According to the IRS, the safe harbor is needed because Congress intended that all employers could partake in the other relief programs while claiming the ERC. This is done by assuring that the same wage dollars are paid for or reimbursed with other relief program funds and are not treated as qualified wages for purposes of the ERC.

What is the safe harbor? The safe harbor allows employers to exclude other economic relief funds from their gross receipts to determine eligibility to claim the ERC for a calendar quarter. Employers may consistently apply this safe harbor if they:

  • Exclude the amount from its gross receipts for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining eligibility to claim the ERC; and
  • Apply the safe harbor to all employers treated as a single employer under the ECR aggregation rules.

How do you elect the safe harbor? To do this, an employer must exclude the amounts received through relief programs listed above from its gross receipts when determining eligibility to claim the ERC on its employment tax return or adjusted employment tax return that calendar quarter. Employers may also file employment tax returns on an annual basis for the year including the calendar quarter.

The safe harbor is to be applied for the purposes of determining eligibility to claim the ERC for wages paid after March 12, 2020, and before January 2, 2022. Employers must retain records to support the credit claimed, including the use of the safe harbor. The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Last week, two Senate members proposed an end to the prized tax break for the private-equity industry. Senate Finance Committee Chairman Ron Wyden and panel member Sheldon Whitehouse proposed a repeal to the carried interest tax break. This would prevent private equity fund managers from paying lower tax rates on their earnings compared to regular income. This bill also prohibits deferring tax payments on those earnings. According to an estimate made by the Joint Committee on taxation, requiring fund managers to pay taxes when they receive profits will raise about $63 billion over the next decade. While the American Families Plan did call for an end to carried interest, it fell short of eliminating an investor’s ability to delay paying taxes on the income. This means that the initial plan would have created about $14 billion over the next decade, according to an estimate from the congressional tax scorekeeper.

In addition to salaries, private equity managers rely on a share of the appreciation of the assets that they oversee, which can be in the millions of dollars. These gains have previously been taxed as capital gains, which is a much lower rate than the top marginal income tax rate applied to wages. Biden has proposed to raise the top income tax rate from the current 37% to 39.6%. Carried interest payments are being taxed at 20% under the current law.

The potential revenue totals are just a small portion of the up-to $3.5 trillion, but the issue represents a symbolic political win for lawmakers who say they want to raise taxes on the wealthiest Americans to make the Tax Code more equitable and lessen income disparities. Carried interest has been under attack from both parties for years. In 2017, the private equity industry successfully fought off major changes in the tax overhaul that year, when some legislators considered cutting the tax break to pay for reductions elsewhere. In the end, the GOP kept the carried-interest tax break intact but required that investors hold their investments for longer to get the benefit.

The Senate will soon begin debating a budget resolution that will serve as the framework to advance the Democrats’ economic agenda. The bill requires unanimous support from Democrats in Congress and will likely consume the legislative agenda in the fall.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.


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