9.22.21 – Mitch Reitman
On September 15, 2021, the House Ways and Means Committee passed a tax bill designed to raise revenue for President Biden’s “Build Back Better” plan. It contains significant changes to the estate and gift tax laws, and the income tax laws related to them. The Bill now heads to the full House where passage is not guaranteed, and must clear the Senate where the Democratic majority is fragile. Keep in mind though that the bill did make it out of Committee, and, if it becomes law, also has some provisions which would take effect the day it is signed into law, which some speculate may be as early as October, though that is highly unlikely.
Some highlights of the Bill that would affect closely held Alarm Companies are:
- Reduction in Estate and Gift Tax Exemption. The estate tax/gift tax/Generation-Skipping Tax exemption, which currently is $11,700,000 per person (or $23,400,000 for a married couple) will be cut roughly in half, effective as of January 1, 2022. This is four years earlier than it is scheduled to do so under the “Tax Cuts and Jobs Act” of 2017. The 2022 exemption will be approximately $6,000,000 per person or a total of about $12 million per couple (and is adjusted for inflation in the future). Therefore, gifts to take advantage of the exemption amount above $6,000,000 and below $11,700,000 per person must be made on or before December 31, 2021.
- Tax rate increases the bill increases the top ordinary income tax rate for individuals and trusts to 39.6% and the capital gains rate is increased from 20% to 25%.
- There also is a new surcharge of 3% on modified adjusted gross income for taxpayers making over $5 million (for trusts, this limit is only $100,000). It is not certain how this would affect sellers of an alarm company in a transaction with a gain that places their adjusted gross income over this threshold.
- There is some language banning certain trusts that is too complex to cover here. My concern is that the language in the Bill inadvertently bans other types of trusts used for tax planning purposes. This could prevent owners of family businesses from forming trust to transfers of interests to descendants. The greatest concern is that the changes would apply to trusts created on or after the date of the Bill’s enactment and limit the use of pre existing trusts. If you are planning on transferring your business to your kids, you may need to do it quickly.
- There also is a requirement that certain “high income” taxpayers withdraw half or all of the balance of IRAs or Roth IRAs to the extent the balances exceed $10,000,000, or in some cases, $20,000,000. While this may not affect any readers of this article, it does show that the focus of the tax Bill is to shift more tax burden to wealthy taxpayers. As time passes, this threshold may be lower.
This Bill could become law before the end of the year, so, if you believe that you may be affected, call your tax pro now.
Mitch Reitman is Managing Principal of Reitman Consulting Group. He is a member of the Electronic Security Hall of Fame. He can be reached at 817-698-9999.