Earlier this week the House of Representatives released their plan for raising an estimated $3.5 trillion to fund the current administration’s social and economic policies. The following provisions have not yet been passed into law and will first have to go through the reconciliation process between both houses of Congress before it becomes law.
Individual Tax Provisions
Effective Post September 13, 2021
- Maximum long-term capital gains tax rate currently at 20% would increase to 25% for sales occurring after September 13, 2021. A transitional rule allows for the 20% rate to apply to written, binding contracts entered into before September 13, 2021, that close later in the year. We are still waiting for guidance on how qualified dividends will be taxed.
- Limitations on the sales of Qualified Business Stock per IRC Section 1202(a) would be capped at 50% (currently 75% and 100%) for taxpayers with adjusted gross incomes of $400,000 or more.
Effective For Tax Years After December 31, 2021
- Highest ordinary income tax rate would increase from the current rate of 37% to 39.6% as it was prior to the enactment of the Tax Cuts & Jobs Act. This top marginal rate applies to single individuals with taxable incomes over $400,000 and married filing joint taxpayers with taxable incomes in excess of $450,000.
- The 3.8% Net Investment Income Tax created under the Affordable Care Act would broaden to apply to pass-through business income for single taxpayers with modified adjusted gross incomes over $400,000 and married filing joint taxpayers with modified adjusted gross incomes over $500,000. This tax would not apply to wages which are already subject to FICA taxes.
- The Qualified Small Business Income Deduction per IRC Section 199A applicable to income from pass-through S corporations and partnerships is now capped at $400,000 for single filers, $500,000 for married filing joint filers, and a maximum $10,000 deduction for trusts and estates.
- A new 3% surtax would apply to taxpayers with modified adjusted gross incomes of $5 million or more.
- Excess business losses in excess of $250,000 for single taxpayers and $500,000 for married taxpayers would be permanently disallowed.
- Traditional and Roth IRA contributions for individuals with retirement accounts exceeding $10 million at the end of the preceding tax year would be prohibited. This provision applies only to single individuals with taxable incomes over $400,000 and married filing joint taxpayers with taxable incomes over $500,000.
- Roth conversions for single taxpayers with taxable incomes over $400,000 and married filing joint taxpayers with taxable incomes over $450,000 would be prohibited.
- Minimum required distributions (MRDs) for individuals with combined IRAs, Roth IRAs, and defined contribution plans exceeding $10 million at the end of the precedingyear increases. The MRD would be 50% of the amount over $10 million. For individuals with taxable income over $400,000 (married filing joint $450,000), any excess above $20 million must be distributed first from Roth IRAs and Roth designated 401(k) plans.
- Traditional and Roth IRA accounts would no longer be eligible to own assets in an entity in which the owner holds a greater than 10% interest (down from current law of 50%) or own any assets in an entity in which the owner is an officer.
- Traditional and Roth IRA accounts could no longer own investments where there are minimum criteria for an owner’s income, education level, or other credentials.
- The unified estate tax credit per individual currently at $11.7 million would be cut in half to $5,850,000.
Business/Trust Tax Provisions
Effective for tax years After December 31, 2021
- Corporate tax rates currently at a flat 21% would change to a graduated system with an 18% tax on the first $400,000 of income up to 21% for income under $5 million. For businesses with taxable incomes over $5 million, a top rate of 26.5% applies with the graduated rates phasing out completely for corporations with taxable incomes over $10 million.
- The holding period for carried interests to receive long-term capital gain treatment generally would extend from 3 years to 5 years. Other restrictions apply.
- The effective requirement date to amortize research & development costs would be delayed to taxable years beginning after December 31, 2025 (currently December 31, 2021).
- New interest limitation deduction per IRC Section 163(n) would apply to certain domestic corporations that are members of an international financial reporting group.
- S corporations in existence prior to May 13, 1996 would be able to reorganize as a partnership without incurring tax.
- Work opportunity tax credit would increase to 50% for the first $10,000 of wages paid to employees in certain targeted groups.
- The employer tax credit for wages paid to employees during family and medical leave would expire for tax years beginning after 2023.
- For companies working internationally, this bill reduces the IRC Section 250 deduction on both global low-taxed intangible income (GILTI) and foreign-derived intangible income (FDII) and changes the calculation for base-erosion and anti-abuse (BEAT) taxes.
Effective upon the Enactment Date of the Act
- Valuation discounts would be eliminated for transfers (gifts) of passive, nonbusiness assets.
- Newly created irrevocable grantor trusts are no longer considered disregarded entities of the grantor where sale transactions between the grantors and their trusts are now treated as taxable third-party sales. The assets of these trusts will also be includable in the grantor’s estates for estate tax purposes. Grantor trusts established prior to the enactment of this law are exempt from these new provisions as long as no additional contributions are made.
Please reach out to theKFORDgroup if you have any questions. We are here to assist you with all of your income tax and estate planning needs.