Tax Update: House Ways and Means Committee Tax Proposal

The House Ways and Means Committee released its preliminary budget reconciliation proposal late on September 13, 2021. This legislation is not final, and negotiations will continue in Congress.

Below is a summary of certain individual, estate and gift, and corporate tax proposals. You will notice that some of the proposals are different than the original Biden Tax Plan. There are also new proposals that were not reflected in the Green Book released by the US Treasury on May 28, 2021.

Individual Tax Proposals

• Increase the top marginal tax rate from 37% to 39.6% on taxable income:
  • Married filing joint filers $450,000
  • Head of household filers $425,000
  • Single filers - $400,000
  • Married filing separate filers $225,000
  • Estate and trusts $12,500

• 3% surtax for taxpayers with modified AGI in excess of $5 million (or $2.5 million for married filing separately).

• Increase in the top rate for long-term capital gain and qualified dividends from 20% to 25% for gains realized after September 13, 2021, date of introduction.
  • Applies to married filing joint filers with income over $450,000 (single over $400,000)
  • Effectively 28.8% (25% + 3.8%, Net Investment Income Tax (NIIT))
  • Gains realized prior to this date will still be taxed at previous preferential rates of 0%, 15%, and 20%, not including NIIT.

• Section 1202 Qualified Small Business Stock (QSBS) modifications:
  • The 75% and 100% exclusion rates will not be available for taxpayers with AGI equal or exceeding $400,000.
  • The 50% exclusion is available for all taxpayers.

• Expansion of Net Investment Income to include investment income received in the ordinary course of business for taxpayers with taxable income more than $400,000 (single) and $500,000 (MFJ).

• Section 461 Excess Business Loss (EBL) Limitation made permanent for non-corporate taxpayers.
  • $500,000 business loss per year. Any remainder will be carried forward.

• Expansion of wash sale rules to include commodities, currencies, and digital assets.

• Retirement Accounts for high income taxpayers:
  • High income taxpayers for retirement proposals taxable income limits:
    • Single or MFS - $400,000
    • MFJ - $450,000
    • Head of households - $425,000
  • Prohibits contributions to a Roth or traditional IRA when the value of the accounts exceed $10 million as of the end of the prior taxable year for high income taxpayers.
  • Minimum required distributions mandatory for IRAs, Roth IRAs, and defined contribution retirement accounts following a year where the ending account balance exceeds $10 million for high income taxpayers.
    • Minimum distribution is 50% of the amount by which the prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds $10 million.
    • Elimination of back-door Roth strategy for high income taxpayers and prohibits all employee after-tax contributions in qualified plans, and after-tax IRA contributions, from being converted to Roth regardless of income level.

Estate & Gift Tax Proposals

• Reduce the lifetime unified credit from $11,700,000 to $5,000,000 per individual.
• Treat sales between grantor trusts and their owners as a sale to a third party.
• Eliminate valuation discount for transfer of nonbusiness assets.

Corporate Tax Proposals

• Create graduated rate structure:
  • 18% on the first $400,000 of income.
  • 21% on income up to $5 million.
  • 26.5% on income above $5 million.
• Modifications of Section 163(j) business interest limitation.
• Section 1061 carried interest changes:
  • Extends the holding period required for gain to qualify for long-term capital gain treatment from 3 years to 5 years.
  • Provision retains the 3-year holding period for real property trades or businesses. This also applies to individuals with AGI less than $400,000.

LTax will continue to keep you updated on all tax legislative and regulatory developments.