Recently, three separate tax proposals have been released (one from President Biden, one from Senator Bernie Sanders, and one from Senator Chris Van Hollen) which, if enacted, would significantly increase the U.S. federal tax liability of wealthy individuals and corporations. None of the proposals have advanced beyond being introduced to Congress (and the Biden proposal has not even reached that stage yet). Thus, it is too early to assess the likelihood that the proposals will be enacted or to estimate a timeframe by which they will be acted upon by Congress.
The key elements of each of the proposals are briefly described below. However, before summarizing the contents of the proposals, it should be noted that many of the laws pertaining to nonresidents with U.S. investments have remained unchanged. Specifically, none of the proposals would change the rules governing: (i) asset situs for estate/gift tax purposes (thus foreign blockers would remain viable planning options for holding U.S. assets); (ii) income or estate/gift tax residency; (iii) the portfolio interest exemption; (iv) when income will be considered derived from U.S. sources and, thus, subject to U.S. income tax; or (v) the classification of entities (i.e., the “check-the-box” rules).
President Biden’s American Jobs Plan
On March 31, President Biden unveiled a $2.25 trillion infrastructure package called the “American Jobs Plan”. To fund the costs of this package President Biden proposed a number of tax increases including:
- Increasing the U.S. federal corporate income tax rate to 28% (from the current 21% rate);
- Increasing the minimum tax that U.S. corporations pay on “global intangible low-tax income” (“GILTI” – i.e., active earnings derived by foreign subsidiaries) to 21% and eliminating a deduction that permits corporations to exclude the first 10% of returns from the GILTI calculation (the current tax rate on GILTI is 10.5% before giving effect to the 10% exclusion);
- Imposing a 15% minimum tax on large corporations’ “book income” (i.e., the income such corporations report to their shareholders); and
- Increasing funding of the IRS to expand audits of large corporations.
Senator Sanders’ “For the 99.5% Act”
On March 25, Senator Sanders introduced the “For the 99.5% Act” (the “Sanders Bill”) that would significantly increase the estate tax liability of the wealthiest U.S. taxpayers. According to a summary released by the Senator’s office, the Sanders Bill would:
- Lower the estate tax exemption amount to $3.5 million ($7 million for married couples) from $11.7 million ($23.4 million for married couples);
- Establish a progressive estate tax rate schedule as follows:
- 45% of the value of an estate between $3.5 million and $10 million;
- 50% of the value of an estate between $10 million and $50 million;
- 55% of the value of an estate between $50 million and $1 billion; and
- 65% of the value of an estate in excess of $1 billion;
- Strengthen the generation skipping tax by applying it, without exclusion, to any trust set up to last more than 50 years;
- Require that assets held in a grantor trust be included in the grantor’s estate to the extent that the value of such assets exceeds the value of the assets the grantor transferred to the trust, thus preventing wealthy families from avoiding gift taxes by merely paying income taxes on earnings generated by grantor trusts;
- “Sharply” limit the annual exclusion from the gift tax for gifts made to trusts by imposing a “per donor” limit on gifts to trusts which are eligible for the annual exclusion – such per donor limit is equal to two times the annual exclusion amount (the current exclusion amount is $15,000 so the per donor limit would be $30,000);
- Close “loopholes” involving valuation discounts and restrictions on assets placed in family businesses.
In addition, the Sanders Bill would (i) lower the gift tax exclusion amount to $1 million and (ii) deny the tax basis step-up with respect to assets held in grantor trusts which are not included in the grantor’s gross estate for estate tax purposes.
Senator Van Hollen’s “Sensible Taxation and Equity Promotion Act of 2021”
On March 29, Senator Van Hollen released the Sensible Taxation and Equity Promotion Act of 2021 (the “STEP Act”). The intent behind the STEP Act is to effectively nullify the current tax rules which permit heirs to take a fair market value tax basis in inherited assets (commonly referred to as a tax basis step-up). Under these rules, otherwise taxable appreciation in a decedent’s assets is purged at death without anyone being required to pay income tax on such appreciation because the gift or bequest of property is not considered a “realization” event which would require the transferor to recognize taxable gain.
As drafted, the STEP Act would eliminate the benefits of the tax basis step-up rules by treating a gift or bequest of property as a realization event and requiring the donor or decedent to recognize gain as though the property were sold at fair market value. The STEP Act permits an exemption of the first $100,000 (as adjusted for inflation) of gains recognized from gifts and the first $1,000,000 (as adjusted for inflation) of gains recognized on bequests.
Thus, if the STEP Act were enacted, a transfer of appreciated property would attract both income tax and gift/estate tax.
 During the presidential campaign, President Biden proposed a number of other tax increases including (i) returning the top individual tax rate to 39.6%, (ii) taxing capital gains and qualified dividends above $1 million at ordinary rates (i.e., at 39.6%), (iii) eliminating the tax basis step-up at death, and (iv) reducing the estate and gift tax exemption amounts to approximately $3.5 million ($7 million for married couples). To date, no further action has been taken by the Biden administration with respect to any of these proposals.
 Please note that the unified estate and gift exemption amount is currently scheduled to decrease by half (to approximately $5.85 million/person or $11.7 million/married couple) for tax years beginning after December 31, 2025.
 If adopted, the Sanders Bill would effectively dispose of the unified estate and gift tax exemption amount and replace it with separate exemption amounts for estate tax (i.e., $3.5 million) and gift tax (i.e., $1 million).