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Estate, Capital Gains Tax Changes Likely to Stay in Spending Bill: Schwab's Townsend

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What You Need to Know

  • President Joe Biden’s $3.5 trillion spending package will shrink to around $2 trillion.
  • Retroactivity of the capital gains and dividends could stay in the package.
  • Democrats and Republicans don’t agree on the mandated auto-IRA provision in the House bill.

A lowering of the estate tax exemption and changes to the treatment of capital gains and dividends are likely to survive the spending bill negotiations in Congress, according to Michael Townsend, director of Legislative and Regulatory Affairs for Charles Schwab.

Earlier this year, President Joe Biden called for ending the step-up in basis, Townsend said. “That proved to be too controversial on Capitol Hill.”

Instead lawmakers went an easier route: “Just lower the exemption amount,” Townsend relayed.

The current exemption amount from the estate tax is $11.7 million, Townsend explained Wednesday during Schwab’s Impact conference. That amount is scheduled to sunset at the end of 2025, he continued, but “what the proposal and the House would do is accelerate that sunset to the end of 2021, which would take the baseline number back to $5 million.”

Adding in the inflation adjustments “will take it right around $6 million per person for the exemption amount,” he continued. “My sense right now is that is something that has pretty strong support and is a very top candidate for being included in a compromise bill.”

On the capital gains side, “the idea is … to take the capital gains top rate to 25% for people earning more than $400,000 per year and making that retroactive to Sept. 13, which is the date of the introduction of the bill.”

Under the current proposal, “gains realized prior to Sept. 13 will be taxed at top rate of 20%; gains realized after that date would be taxed at a top rate of 25% for folks earning more than $400,000 per year. Now could that change? Yes, it could change; that is still being negotiated.”

More on this topic

Right now, however, “I think the sense is that the retroactivity of just the capital gains and dividends provision, not any other provision … could stay in the final package.”

Also likely to be included: “Some kind of increase to the corporate tax rate,” Townsend said.

“Right now the proposal is for a 26 and a half percent [rate] for companies earning more than $5 million per year. That number could change. There are moderates in the Senate saying what about 24%, 25%, something like that. So don’t be surprised that that number comes down just a little bit in the negotiations on the individual side. The one that I think is closest to a slam dunk, if that’s possible, is taking the top individual income tax rate back to 39.6%.”

President Joe Biden’s $3.5 trillion spending package “will shrink,” as the amount being talked about now is $2 trillion, Townsend said.

“It’s going to be very difficult. That’s not trimming around the edges; that is excising entire policy initiatives out of this package. … Some of these tax increases may be shrunk or even more likely fall away. And we just don’t know at this point, which ones; the other factor here is the fact that the … this is a House bill that we’re talking about,” he opined.

The Senate will want to make changes. What could get chopped? The retirement provisions.

“Democrats and Republicans don’t really agree on the automatic mandated auto-IRA provision that was included in the House version of the bill … . So we’ll see how that all plays out, but I would not be surprised to see Congress probably in 2022 revisit some of these retirement provisions, particularly around increasing the required minimum distribution age; that’s going to be something I think to watch next year.”