- House Democrats outlined tax increases they aim to use to offset up to $3.5 trillion in spending on the social safety net and climate policy.
- The proposal includes top corporate and individual tax rates of 26.5 percent and 39.6 percent, respectively.
- Keep in mind that the following are only proposals. Further discussion in House and Senate will most likely result in negotiated changes.
In recent months, Congress has been working on a $3.5 trillion spending and tax package that Democrats and the White House hope to pass through the budget reconciliation process this fall. This legislation would advance many of President Biden’s economic and social policies.
Recently the U.S. House Ways and Means Committee held markup sessions for portions of the $3.5 trillion reconciliation bill. The provisions approved by the committee include 12 weeks of paid family and medical leave for workers, a mandate for small businesses to enroll employees in tax-deferred retirement accounts, and childcare grants to states to expand access to childcare.
To pay for the social and economic policies in the reconciliation package, Democrats are proposing a series of tax increases and changes. Last week, the House Ways and Means Committee released draft legislation extending the recently expanded child tax credit and extending several energy credits for 10 years. The committee released the rest of its tax proposals which include many provisions. The following are a few of the provisions we think will have the most impact on our clients:
- Increase the top rate to 26.5 percent from 21 percent for corporations with incomes of $5 million while reducing the rate to 18 percent for corporations with incomes less than $400,000. This is a more modest increase from the 28 percent included in the president’s proposals. The committee’s proposal would be a change from the current flat rate to a progressive corporate tax rate.
- Delay the effective date of requirement to amortize R&D expenses (versus immediately deducting) to taxable years beginning after December 31, 2025. Under current law, the amortization requirement is scheduled to begin in taxable years beginning after December 31, 2021.
- Increase the Work Opportunity Tax Credit (WOTC) to 50 percent of the first $10,000 in wages paid to an employee in his or her first or second year of employment who falls in one of the WOTC targeted groups (other than summer youth employees). This change would apply to qualifying employees hired after date of enactment and before January 1, 2023.
- Create a new 3 percent surtax on individuals with modified adjusted gross income exceeding $5 million ($2.5 million for a married individual filing separately), a provision not included in the president’s proposals. This is proposed to be effective for tax years beginning after December 31, 2021.
- Expand the Net Investment Income Tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income greater than $400,000 for single filers or $500,000 for joint filers, as well as for trusts and estates. Essentially, this change would subject all earnings from pass-through businesses to either the 3.8 percent self-employment Medicare tax or the 3.8 percent NIIT, regardless of whether the income is from a passive or nonpassive activity. The proposed effective date is tax years beginning after December 31, 2021.
- Increase the top ordinary income tax rate to 39.6 percent. Thus the top potential tax rate would be 46.4 percent (39.6 percent top individual tax bracket + 3.8 percent NIIT + 3 percent surtax on income over $5 million). The proposed top 39.6 bracket would start at taxable income levels of $400,000 for single ($450,000 married filing joint); this is lower than under the president’s plan, which would have the top rate kick in at $452,700 and $509,300, respectively (adjusted annually for inflation). As a result, more high-income Americans would be subject to the top rate under the committee’s proposal. The proposed effective date is for taxable years beginning after December 31, 2021.
- Limit the maximum §199A qualified business income deduction to $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate. The proposed effective date is for taxable years beginning after December 31, 2021.
- Increase the top capital gains rate to 31.8 percent (25 percent statutory rate + 3.8 percent NIIT + 3 percent surtax). This proposal is lower than the 43.4 percent top capital gains rate proposed by the president for those with adjusted gross incomes exceeding $1 million ($500,000 married filing separately). The proposed effective date for a 25 percent capital gain rate is September 13, 2021. The proposed legislative text currently provides that any transactions completed on or before September 13, 2021, or subject to a binding written contract on or before September 13, 2021 (even if the transaction closes after September 13), are subject to the current 20 percent top capital gains tax rate. Any capital gains recognized after September 13, 2021, are proposed to be subject to the new top 25 percent rate.
- Temporarily allows certain S corporations to reorganize as partnerships without triggering tax. The eligible S corp would need to completely liquidate and transfer substantially all its assets and liabilities to a domestic partnership during the two-year period beginning on December 31, 2021.
- Cut the estate and gift tax lifetime exemption in half from the current inflation-adjusted $10 million per person ($11.7 million in 2021) to an inflation-adjusted $5 million. The proposed change would apply to estates of decedents dying and gifts made after December 31, 2021. This provision is not included under the president’s proposal, which instead seeks to reform the taxation of capital income by creating a realization event at death.
- Impose new contribution limits and increase the minimum required distributions for high-income taxpayers when the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. This provision was not included in the president’s proposals. The proposed effective date is December 31, 2021.
- Eliminate the so-called “back-door” Roth IRA strategy for taxpayers with taxable income exceeding $400,000 ($450,000 for joint filers). Currently, taxpayers may make nondeductible contributions to a traditional IRA, and then convert the traditional IRA to a Roth IRA, regardless of income level.
The House Ways and Means Committee will hold markup sessions in the coming weeks to vote on these proposed tax provisions. A majority vote in committee is required for the bill to advance to the House floor for a vote.
Boeckermann Grafstrom & Mayer (BGM) will continue to monitor this issue and keep you informed if a final bill is passed. Please contact your BGM tax professional if you would like to discuss how the proposed changes could affect you or your business. You may also connect with us by completing and submitting the Contact Us form.