Earlier this week the House Ways and Means Committee released a summary on a new tax increase proposal. Outlined below are the proposed changes broken out by the effects on corporations and individuals.
Corporations and Pass-Through Entities
- The top tax rate for net income over $5 million would rise to 26.5%.
- Net income between $400,000 and $5 million would have a tax rate of 21%.
- Net income of less than $400,000 would be taxed at an 18% rate.
- Pass-through businesses would face Qualified Business Income caps on the 20% deduction for individuals with income greater than $400,000 and married couples greater than $500,000. Also, the business would now be subject to the 3.8% tax (similar to the Net Investment Income Tax) on their active business income.
- Companies would face new limits on interest deductions and higher taxes on their foreign income including, the minimum tax on U.S. companies’ foreign income would rise to 16.6%. Companies would be able to exclude an amount equal to 5% of their foreign tangible assets from the minimum tax. The minimum tax would be calculated for each foreign country
- The special 75% and 100% exclusion rates for gains realized from certain Qualified Small Business Stock will not apply to taxpayers with adjusted gross income equal to or exceeding $400,000.
- There would be a payroll credit for employing local news journalists.
Individuals
- The top marginal tax rate would rise to 39.6% for taxable income starting at $400,000 for individuals and $450,000 for married couples.
- A 3-percentage-point surtax would apply to individuals and married couples with adjusted gross income above $5 million.
- The capital gains rate would rise to 25% from 20%. When combined with an existing 3.8% investment-income tax and the surtax (if applicable), the new top rate on capital gains could be as high as 31.8%.The capital gains tax increase would be effective as of September 13, 2021, with special transition rules for deals with binding contracts that haven’t been completed yet.
- Individuals with tax-preferred retirement accounts totaling $10 million or more would no longer be able to contribute to those accounts and would face higher mandatory distributions once the account balances reached that level.
- Land rights donations for syndicated conservation easements would be limited.
- The legislation would reverse the doubling of the estate tax exemption that Congress created in 2017. Instead of that increase expiring at the end of 2025, it would end after 2021. Currently each person can transfer around $11 million before paying estate tax, after January 1, 2022 that amount is scheduled to go down to around $5 million.
- Elimination of estate/gift valuation discounts on assets not used in active trade or business (applies to transfers after date of enactment). This would affect gifting of family limited partnership units to family members.
- Significant restrictions will be imposed on Roth conversions for high-income earners.
- A grantor trust will now be pulled into a decedent’s taxable estate when the decedent is the deemed owner of the trust. Also, transactions between grantor and grantor trust become taxable, prior transactions will be grandfathered.
- IRA owners cannot invest their IRAs assets in a corporation, partnership, trust or estate in which they have a 50% or greater interest.
- Non-business losses (previously allowed up to $500,000 in losses that offset wages and investment income) will no longer be allowed. Any losses will carry to the next tax year.
- For carried interests, the provision generally requires investment funds to hold assets for more than five years, up from three years, for managers to get a preferential tax rate on their share of the fund’s profits. The provision retains the three-year holding period for real property trades or businesses and taxpayers with an AGI of less than $400,000.
There are a few things that were previously proposed in other tax plans that are NOT in the House Ways and Means proposal:
- No repeal of step up in basis at death
- No change to estate tax rates
- No excise tax on stock redemptions
- No overhaul of partnership tax rules
- No overhaul of the tax treatment of financial products and derivatives
- No changes to rules for nonqualified deferred compensation
- No life insurance carrier stabilization
- No SALT tax relief
As stated previously, this is the current proposal as it is currently written and is not final. We can infer from the past that things will most likely be changed before it is all done. Our team is committed to staying on top of any changes and what this means for our clients. If you would like to talk through how this might affect you, please reach out to your Saville team member.
To read the full summary from the House Ways and Means committee please see the link here.