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2021 - a tax year of uncertainty
In the spring of 2021, the Biden administration proposed the “Build Back Better Plan,” which provided for additional spending of $3.5 trillion over 10 years. Under the procedure known as reconciliation, if the plan passes the Senate by a majority, it requires that revenue generated from changes in the tax law substantially pay for the additional spending.
Some of the proposals for tax increases to pay for the plan included increases in personal income tax rates and increases in capital gain tax rates to approximately 25%. More effective, as of Sept. 23, 2021, reductions in the estate tax exemption to one-half of the current exemption would disallow a step-up in basis on assets owned by decedents at death and provide for taxes on the unrealized appreciation in estates on assets owned at death and elimination of the ability to utilize grantor trusts or valuation discounts for assets that are gifted during lifetime.
On Nov. 19, 2021, the U.S. House of Representatives approved the Build Back Better Act (the BBB Act) under budget reconciliation. The BBB Act reduced the spending to approximately $1.7 trillion and increased taxes by approximately $1.4 trillion in individual and corporate tax increases over 10 years, as calculated by the congressional budget office. Fortunately, none of the proposals identified in the above paragraph are incorporated in the House bill and it is anticipated that none of them will be incorporated by the Senate. This is extremely good news for non-public businesses and the vast majority of taxpayers who have taxable income of less than $1 million per year.
It was surprising that the BBB Act as passed did not include (as was originally expected) a removal of the limitation on deductions for state and local income tax of $10,000 for individuals, otherwise known as the SALT cap.
Chuhak & Tecson recently sponsored a seminar that included three renowned experts on tax policy (the Experts). The Experts were of the opinion that the SALT cap will allow for significantly higher amounts to be deductible if the BBB Act passes the Senate. The increase in the deduction would have been effective beginning in 2021. Regardless of the passage of the BBB Act by Congress, individual taxpayers who pay Illinois income tax on income from pass-through entities such as partnerships, limited liability companies or S corporations will be able to avoid the SALT cap limits on such income.
On Aug. 27, 2021, Governor Pritzker signed into law the Optional Pass-Through Entity Tax, a tax workaround for the SALT cap effective for years ending Dec. 31, 2021, but prior to Jan. 1, 2026. This will allow the pass-through entities to pay Illinois state income taxes and provide a method that eliminates payments by individuals who own those entities to pay Illinois state income tax. The tax rate that will be due from the entity is 4.9% of Illinois net income. It is important to observe that this workaround is effective for calendar-year taxpayers for the year 2021.
We have reached December 2021 and the Senate has not yet taken up the BBB Act and we are left, as of today, with the same uncertainties of the tax increase and whether there will be any tax changes beginning in 2022. The Experts were of the opinion that a form of the BBB Act will pass by early 2022. If passed, it is clear that there will be higher taxes on publicly traded corporations, higher taxes on very high income taxpayers and increased enforcement by the Internal Revenue Service with the addition of audit staff and new information reporting requirements.
As we approach the end of 2021 and beyond, it is important for taxpayers to review their tax situation and consult with professionals for optimal solutions. The business and tax attorneys at Chuhak & Tecson will be pleased to assist with your individual or organizational tax questions.
Client alert authored by: Edwin I. Josephson (312 855 4349), Principal and leader of Chuhak & Tecson’s Corporate Transactions & Business Law practice group.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.