On September 13, 2021, the House Ways and Means Committee released draft legislative text of tax proposals contained in a $3.5 trillion spending and tax package that would advance many of President Biden’s economic and social policies. The tax proposals will be considered and marked up in Committee on September 14 and 15. Democrats and the White House hope to use the budget reconciliation process to enact a large number of Democratic initiatives requiring only a simple majority in the Senate. While the full content of the proposals is not yet fully known, the Committee has been releasing draft texts of parts of the legislation over the past week. The House Ways and Means Committee also proposes to expand IRS enforcement through an additional $78.9 billion in funding over 10 years. Below is a summary of selected individual, corporate, and estate/gift tax proposals in the current draft legislation which may have the greatest impact to many taxpayers:
· Increase the top individual tax rate from 37% to 39.6% (this rate would be applicable to filers with taxable income over the following thresholds: joint filers over $450,000, heads of households over $425,000, single individuals over $400,000, married filing separate over $225,000, and estates/trusts over $12,500)
· Impose a new 3% surtax for taxpayers with modified adjusted gross income in excess of $5 million ($2.5 million for married filing separate)
· Increase the top rate for long-term capital gains and qualified dividend income from 20% to 25% for long-term capital gains and qualified dividend income recognized after 9/13/2021 (unless the sale was pursuant to a legally binding contract in place prior to 9/14/2021, which would allow the 20% rate)
· Expand the net investment income (NII) tax to include net investment income derived in the ordinary course of business, for taxpayers with taxable income over $400,000 (single filers) and $500,000 (joint filers), as well as trusts and estates
· Set the maximum allowable deduction for Qualified Business Income (QBI) at $500,000 for joint filers, $400,000 for single filers, $250,000 for married filing separate, and $10,000 for trusts and estates
· Limit the treatment of Qualified Small Business Stock (QSBS): 75% and 100% exclusion rates would apply only to taxpayers with AGI of less than $400,000, while the baseline 50% exclusion would remain available for all taxpayers (these changes would be retroactive to gains from sales and exchanges occurring after 9/13/2021, unless pursuant to a legally binding contract that was in place prior to 9/14/2021)
· Expand the wash sale rules to include commodities, currencies, and digital assets
· Amend Section 461(l) to permanently disallow excess business losses (i.e., net business deductions in excess of business income) for noncorporate taxpayers
· For retirement accounts:
No contributions to an IRA or Roth IRA would be permitted during a year if the balance exceeds $10 million at the end of the prior year (for single filers and married filing separate filers with taxable income over $400,000, and joint filers with taxable income over $450,000)
Impose new minimum required distributions for IRAs, Roth IRAs, and defined contribution plans for a year following a year where the ending account balance exceeds $10 million (with the taxable income limits as listed above)
Eliminate Roth conversion strategies for high-income taxpayers for both IRAs and employer-sponsored retirement plans (e.g., making a nondeductible contribution to a traditional IRA followed by a conversion to a Roth IRA) for single taxpayers or married filing separate with taxable income over $400,000, married filing joint with taxable income over $450,000, and heads of household with taxable income over $425,000
Prohibit IRAs from holding securities that require accredited investor status (effective for tax years beginning after 12/31/2021, with a 2-year transition period for IRAs already holding these investments)
· Replace the flat 21% tax rate with a graduated tax structure as follows: (1) 18% on the first $400,000 of income; (2) 21% on income from $400,000 up to $5 million; and (3) 26.5% on income above $5 million. The graduated rate would phase out for corporations making more than $10 million. Corporations taxed as personal service corporations would not be eligible for graduated rates and are subject to a flat 26.5% rate.
· Add a new Code Section 163(n) that would limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense
· Delay the effective date of the requirement to amortize R&D expenses (vs. immediately deducting) to taxable years beginning after 12/31/2025. Under current law, the amortization requirement is scheduled to begin in taxable years beginning after 12/31/2021.
· Extend from 3 to 5 years the holding period required for gain attributable to an applicable partnership interest to qualify for long-term capital gain treatment. The proposal would retain the 3-year holding period for real property trades or businesses and taxpayers AGI less than $400,000 and would extend Sec. 1061 to all assets eligible for long-term capital gain rates.
· Increase the minimum tax on U.S. companies’ foreign income from 10.5% to 16.5%, along with several other changes to the international tax regime
Estate & Gift Taxes
· Reduce the current lifetime exemption of $11.5 million per person to $5 million per person (indexed for inflation). As drafted, this change would apply to transfers after the 2021 tax year.
· Eliminate valuation discounts for transfer tax purposes when a taxpayer transfers nonbusiness assets
· Require grantor trusts to be included in the decedent’s taxable estate when the decedent is the deemed owner of the trusts
These tax proposals will likely change as the final bill is drafted and moves through the legislative process. We will continue to provide updates as this legislation moves forward.
The Marston Group, PLC