Chairman Camp’s Discussion Draft of Tax Reform Act of 2014 and President Obama’s Fiscal Year 2015 Revenue Proposals: Proposals Relating to Individuals, Retirement Plans, and Estate and Gift Taxation

Sullivan & Cromwell LLP - March 18, 2014
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On February 26, 2014, Ways and Means Committee Chairman Dave Camp released a discussion draft of tax reform legislation entitled the “Tax Reform Act of 2014” (the “Discussion Draft”).  Although the Discussion Draft is unlikely to be enacted in its current form, some or all of the proposals may serve as a template for future legislation.  In addition, on March 4, 2014, the Obama Administration (the “Administration”) released the General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (commonly known as the “Green Book”).  Although the Green Book does not include proposed statutory language, the Green Book contains significant detail about the fiscal year 2015 revenue proposals.  Many of these proposals were made previously by the Administration but were not enacted into law.

This memorandum discusses key aspects of the Discussion Draft and Green Book relating to (1) individual income taxation, (2) the taxation of qualified retirement plans, and (3) estate and gift taxation.  We will be distributing separate memoranda addressing Discussion Draft and Green Book proposals relating to (1) corporate and partnership taxation and (2) international taxation, both of which may be obtained by following the instructions at the end of this memorandum.

The Discussion Draft proposals include:

Proposals affecting the U.S. federal income taxation of individuals
 

  • simplifying the tax rate structure by replacing existing tax brackets with 10 percent and 25 percent tax brackets and a 35 percent tax bracket for certain income, repealing the alternative minimum tax and replacing preferential capital gains rates with a 40 percent deduction;
  • imposing a 10 percent tax rate on certain amounts otherwise excluded from income;
  • eliminating several deductions and personal exemptions in favor of an increased standard deduction;
  • modifying adjusted gross income (“AGI”) limitations for charitable conributions, imposing a 2 percent of AGI floor on charitable contribution deductions and generally limiting value of contributed property (other than publicly-traded stock) to the donor’s adjusted basis;
  • requiring the use of a first-in first-out basis method in determining the basis of stock sold; and
  • implementing new related party wash sale rules;
     
Proposals affecting the U.S. federal income taxation of qualified retirement plans
 
  • limiting traditional-style retirement accounts;
  • prohibiting new SEP and SIMPLE 401(k) plans;
  • prohibiting new contributions to traditional IRAs;
  • suspending cost of living adjustments on contribution and deferral limits for tax-favored retirement plans and keeping them at the 2014 level through 2023;
  • eliminating recharacterization of Roth contributions;
  • eliminating the income limits on contributions to Roth IRAs; and
  • applying minimum required distribution rules to employees becoming 5 percent owners after age 70 ½.
     
The Green Book proposals include:

Proposals affecting the U.S. federal income taxation of individuals
 
  • implementing the “Buffett Rule,” or new minimum tax, on high-income taxpayers;
  • reducing the value of exclusions and deductions for higher-income taxpayers to 28 percent; and
  • requiring the use of an average basis method in determining the basis of stock sold;
     
Proposals affecting the U.S. federal income taxation of qualified retirement plans
 
  • requiring small employers to offer an automatic IRA option to employees, and expanding the small employer tax credit for employers required to do so;
  • limiting the total benefits in tax-favored retirement accounts; and
  • requiring Roth IRA holders to be subject to the minimum required distribution rules;
     
Proposals affecting the U.S. federal taxation of estates and gifts
 
  • restoring the estate, gift and generation-skipping transfer (“GST”) tax rates and exclusion amounts to 2009 levels, beginning in 2018;
  • modifying the gift tax annual exclusion;
  • requiring a minimum term of 10 years for a grantor retained annuity trust (“GRAT”), requiring  the initial value of the remainder interest in a GRAT be greater than zero, and prohibiting any decrease in the stated annuity amount payable during the GRAT term;
  • imposing certain transfer taxes on grantor trusts receiving property in a sale, exchange or comparable transaction;
  • limiting the duration of the GST tax exemption allocated to a trust to 90 years; and
  • providing that distributions from health and education exclusion trusts are not exempt as medical care and tuition expenses.

In addition, both the Discussion Draft and Green Book contain proposals that include: 

Proposals affecting the U.S. federal income taxation of individuals
 
  • modifying deductions for certain contributions of conservation easements; and
  • requiring taxpayers to take accrued market discount into income currently, in the same manner as applicable for original issue discount;
     
Proposal affecting the U.S. federal income taxation of qualified retirement plans
 
  • imposing new time limits on distributions to non-spouse beneficiaries of tax-favored retirement plans and IRAs;
     
Proposal affecting the U.S. federal taxation of estates and gifts
 
  • requiring consistency in valuations for transfer tax and income tax purposes.