Tax Changes on the Horizon for High-Net-Worth Individuals

President Biden’s FY 2022 budget proposal confirms the administration’s intention to enact significant tax reform measures that will impact tax planning strategies for high-net-worth individuals. The Treasury Department released its general explanations of tax and revenue proposals to address the changes.

Key changes reflect many of the campaign promises Biden made, including:

Top Individual Income Tax Rate

Top marginal income tax rate would increase from 37 percent to 39.6 percent for tax years beginning after 2021.

Capital Gains Tax & Recognition

Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, but only to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. This proposal would be effective for gains required to be recognized after the date of announcement.

Capital Gains on Appreciated Assets

Tax-free step-up in basis for appreciated property upon death or gifting would be eliminated in 2022, leaving the estate or donor to realize a capital gain on the asset at the time of transfer. Exceptions include transfers to U.S. spouses, who would not recognize the gain until their own death or disposition of the asset, and for transfers to charities, which will not generate a taxable capital gain. For split-interest trusts, this exclusion would apply to the charity’s share of the gain only.

Fortunately, there is some relief to soften the blow. The bill seems to imply that capital loss carryovers before death or before gifting can be used to reduce taxability of gains and up to $3,000 of ordinary income on the decedent’s final income tax return. Expenses such as the cost of an appraisal will reduce the taxable gain. The tax incurred on transfers at death would be deductible on the decedent’s estate tax return.

Payment of tax on the appreciation of certain family businesses would not be due until the interest in the business is sold or it ceases to be family-owned and operated. This is substantially different than other proposals that have been previously made in Congress.  While it does not create tax upon gifting or inheriting, it does completely remove the benefits of a step-up on family business assets. It also gives taxpayers time to defer and potentially mitigate life insurance expenses if they are combining estate planning and insurance with the family-owned business.

The proposal also allows for a 15-year fixed-rate payment plan for taxes on other appreciated assets transferred at death (except liquid assets and business assets deferred until sold).

Capital Gains on Unrealized Appreciation

Gain on unrealized appreciation would be recognized by the trust, partnership or other non-corporate entity that owns the property and has not been the subject of a recognition event within the past 90 years (beginning on January 1, 1940), effectively making the earliest possible recognition date December 31, 2030.

An exclusion will apply to up to $1 million of recognition of unrealized gains per person on property transferred by gift or held at death in 2022 (indexed for inflation thereafter). This exclusion is portable to the surviving spouse.

Pass-Through Income

All pass-through trade or business income would be subject to net investment income tax (NIIT) or self-employment taxes for certain high-net-worth individuals. The Section 199A deduction for pass-through entity owners would no longer be available to taxpayers making $400,000 or more. Other temporary provisions of the Tax Cuts and Jobs Act, currently set to sunset in 2025, would expire under the bill.

Section 1031 Tax-Deferred Exchanges

Real estate investors may also lose a significant tax strategy under the proposal, which limits future Section 1031 exchanges to a deferral of taxes on no more than $500,000 of gains. Because of the hefty requirements and complexities of this tax-deferral vehicle, it is often only economical for properties with substantial built-in gain.

This is not the first time Section 1031 exchanges have been targets of tax reform. The Tax Cuts and Jobs Act of 2017 (TCJA) limited its use to real property only (formerly available for a broad range of property held for business use or as an investment).

461(l) Loss limitation

The proposal makes permanent the limit on deducting business losses exceeding $250,000 ($500,000 for joint filers) under Section 461(l). Originally scheduled to be in effect from 2018 through 2026, the limit  was suspended from 2018 through 2020, but is back in place for 2021.

The Time to Act is Now

If the proposed budget is passed, the second half of 2021 will be a critical time to gift low-basis assets and move other assets out of your estate under current favorable exemption amounts. Grassi’s Trust & Estate and Tax Consulting professionals can develop a plan customized to your current situation and future goals.

Contact your Grassi advisor, Lisa Rispoli, Trust & Estate Services Leader, at lrispoli@grassicpas.com or Rozleen Giwani, Tax Partner at rgiwani@grassicpas.com.


Rozleen Giwani Rozleen Giwani, CPA is a Tax Partner at Grassi, where she focuses on tax planning and preparation services for high-net-worth individuals and businesses. Rozleen helps clients meet their tax mitigation and wealth preservation goals through a wide range of tax savings vehicles, including gifting, trusts and estate planning strategies. She has extensive experience with grantor retained annuity trusts, complex and simple trusts, gift tax... Read full bio

Lisa Rispoli Lisa Rispoli is the Partner-in-Charge of Trust & Estate Services at Grassi. With over 30 years of experience in accounting, estate planning and gift, estate and trust taxation, Lisa is adept at working with clients and their other professional advisors to develop estate plans to transfer family, businesses and personal wealth to the next generation and to charitable organizations. Lisa assists executors and trustees,... Read full bio