Too soon to know the fate of tax increases attached to proposed budget bill

It is too soon to breathe a sigh of relief when it comes to tax increases attached to the budget reconciliation bill that has been introduced.

On August 24, 2021, the House of Representatives approved the framework of a $3.5 trillion budget reconciliation bill, but did not act on the $1.2 trillion Infrastructure Investment and Jobs Act. These bills had been stalemated because of disagreements over simultaneous passage, but House Speaker Nancy Pelosi indicated an intent to pass both by the end of September. The infrastructure bill, which does not include any tax increases and has already passed the Senate, would then be ready for enactment with the president’s signature.

The $3.5 trillion budget reconciliation bill, however, will still require passage by the Senate. All 50 Democrat votes would be required for the bill to pass – and, on August 23, Senator Krysten Sinema indicated that she will not support the bill, which would block its final passage. Of course, before the bill is passed by the House, tax increase provisions need to be drafted that will pay for the increased spending. That process will likely begin in the House Ways and Means Committee in the next two weeks. These provisions will likely follow President Joe Biden’s proposal, with a mix of provisions proposed by Sen. Bernie Sanders and others.

What’s next?

Circumstances may change but not likely in the short term. The gift and estate planning strategies McDonald Hopkins has discussed previously – first in April and updated in July – will still help save estate and gift taxes even if there are no tax changes until 2026, when the estate and gift tax exemption will be reduced to one-half of the current level with annual inflation adjustments. It also appears likely that support for deemed sales of assets on transfers during life or at death (i.e., capital gains taxes payable on appreciation as if the transferor sold the asset and transferred cash) may be waning, but be aware that if enacted this would be a significant, disruptive and costly change. There would likely be exemptions for some transfers—i.e., $1 million per person, plus the current exemption of $250,000 ($500,000 for a married couple) of gain on the sale of a primary residence. Other changes that would eliminate transfer tax and income tax planning opportunities would not be enacted, if the budget bill does not pass.

We will continue to monitor the situation and update this series of posts as appropriate.