House Ways & Means Committee Proposed Tax Increases

On September 13, 2021, the House Ways and Means Committee released proposed tax legislative text as part of a broader $3.5 trillion budget proposal. This is the most detailed picture yet of the tax changes the administration is proposing and includes the following:

Corporations

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 as follows:

• $0 to $399,999 – 18 percent
• $400,000 to $5 million – 21 percent
• More than $5 million – 26.5 percent

Corporations that are taxed as personal service corporations are not eligible for the graduated rates and instead are subject to a flat 26.5 percent rate. These tax increases are proposed to be effective for taxable years beginning after December 31, 2021.

• Increase minimum tax on US companies’ foreign income to 16.5 percent from 10.5 percent, along with several other changes to the international tax regime.

Individuals

• Increase the top ordinary income tax rate to 39.6 percent. The proposed top bracket would start at taxable income of over $400,000 for single ($450,000 married filing joint) The proposed effective date is for taxable years beginning after December 31, 2021.
• Create a new 3 percent surtax on individuals with modified adjusted gross income exceeding $5 million, 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.

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WM Wisdom:

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.

• 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 25 percent. 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.

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WM WISDOM:

This proposal is lower than the 39.6 percent top capital gains rate proposed by the president for those with adjusted gross incomes exceeding $1 million however, the new rates would apply to lower income levels of over $400,000 for single and $450,000 for married filing jointly.

• Limit the exclusion on qualified small business stock under §1202 for taxpayers with adjusted gross incomes of $400,000 or more, or any estate or trust. Under the proposed provision, the special 75 percent and 100 percent exclusion rates would not be available to these taxpayers; however, the baseline 50 percent exclusion would remain available to all taxpayers. This provision was not included in the president’s proposals. The amendments made by this section are proposed to apply to sales and exchanges after September 13, 2021, subject to a binding contract exception.
• Increase holding period to receive long-term capital gain treatment for carried interest from three to five years, effective December 31, 2021. The current three-year holding period rule would continue to apply for real property trades or businesses and taxpayers with adjusted gross income less than $400,000. Under the president’s proposal, the carried interest would be eliminated if a partner’s taxable income exceeds $400,000.
• Require grantor trusts to be included in a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Currently, taxpayers can use grantor trusts to push assets out of their estate while controlling the trust closely. This provision was not included in the president’s proposals but would be effective only for future trusts and future transfers made after enactment of this provision.
• Cut the estate and gift tax lifetime exemption in half from the current inflation adjusted $10 million per person 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.
• 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. This provision would eliminate this opportunity for distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

There are a few key notable omissions from the committee’s proposal as compared to the proposals of the president, including:

• Provisions dealing with basis step-up rules for inherited or transferred assets
• Limitation on like-kind exchanges
• No mention of a full or partial repeal of the current $10,000 cap on state and local tax deductions

The possibility of the proposals outlined by the House and Senate, as well as the overall package, is subject to change as congressional negotiations are in progress. We are continuing to monitor this tax legislation, which we expect will continue to proceed through Congress this fall. In the meantime, please do not hesitate to reach out to Wouch Maloney team to discuss how the proposed changes could affect you or your business.

Questions?

Should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.

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