Tax Law Changes: C-Corporations, Capital Gains & Grantor Trusts

By Paul Lechner, Esq., CPA — Lechner Law Office, P.C.

January 1, 2022 — Proposed Tax Changes

Several significant tax law changes were proposed in 2021 affecting business owners, investors, and estate planners. Here is a summary of the key provisions:

C-Corporation Tax Rates

C-Corporations are currently taxed at a flat 21%. The proposed graduated rate structure would impose 18% on the first $400,000 of income, 21% on income up to $5 million, and 26.5% on income exceeding $10 million. These rates remain significantly lower than corporate tax rates prior to the 2017 Tax Cuts and Jobs Act.

Capital Gains

Capital gains taxes would be raised from 20% to 25% for transactions originating after September 13, 2021. This affects the planning calculus for business sales, investment portfolio rebalancing, and estate transfers.

Irrevocable Grantor Trusts

Currently, irrevocable “Grantor Trusts” are typically not included in a grantor’s estate, and transfers to them are not subject to gift tax. Under the proposed changes, future trusts and future transfers would be included in the deemed owner’s estate and subject to gift tax — significantly affecting advanced estate planning strategies.

Roth IRA Contributions

Roth IRA contributions can currently be made irrespective of account balance. Effective January 1, 2022, high-income earners would be prohibited from contributing once their account balance exceeds $10 million.

Net Investment Income Tax

The definition of “Net Investment Income” for the 3.8% tax under Code Section 1411 would be broadened to include income derived in the ordinary course of business for higher-income filers — significantly expanding the reach of this tax for active business owners and professionals.