Pending Tax Changes: House Ways and Means Committee Tax Proposals | Bodman
On September 13, 2021, the U.S. House Ways and Means Committee released a budget reconciliation bill proposing a number of important tax changes for businesses and individuals.
Some of the key proposals include:
- Replacement of the fixed rate of 21% for corporations by a progressive rate structure (18% on taxable income less than $ 400,000; 21% on taxable income between $ 400,000 and $ 5,000,000; and 26.5 % on taxable income over $ 5,000,000). The benefit of the graduated rate structure would gradually disappear for companies earning more than $ 10,000,000. Taxable income over $ 10,000,000 would be subject to an additional 3% tax, up to a maximum of $ 287,000, to offset the benefit of graduated rates.
- Increase taxes on international income by limiting certain deductions and increasing the global low-tax intangible income tax (“GILTI”), the tax on intangible income derived from abroad (“FDII”) and Base erosion and anti-abuse tax (“BEAT”) rates.
- Limitation of gross income exclusion for qualifying small business equity (“QSBS”) earnings under §1202. The 75% and 100% exclusion rates for QSBS earnings would not apply to taxpayers with income of $ 400,000 or more. At this higher bracket, a 50% exclusion would still be available. These limits would apply to transactions after September 13, 2021.
- Under one exception, the existing rules would remain in place for transactions under a binding written contract in effect on September 12, 2021 and not materially changed thereafter.
- Limit the tax benefits associated with the use of irrevocable transferor trusts for private business succession planning.
- Increase the maximum individual rate to 39.6% and apply this marginal rate to joint filers whose taxable income is greater than $ 450,000 and to single filers whose taxable income is greater than $ 400,000.
- Increase of the maximum rate of surplus value from 20% to 25%.
- Under one exception, existing rates would remain in place for transactions that close in 2021 under a binding written contract in effect on or before September 13, 2021 and not materially changed thereafter.
- Impose a 3% surtax on persons whose modified adjusted gross income is greater than $ 5,000,000.
- Widen the 3.8% net investment income tax to apply to all net income earned in the course of normal business or business operations for taxpayers with taxable income above 500 $ 000 for joint filers and $ 400,000 for single filers.
- Amend the “deferred interest” rules under §1061 to increase the holding period required for processing long-term capital gains to five years.
- Limiting the 20% deduction from qualifying business income (section 199A) for flow-through entities to a maximum deduction of $ 500,000 for joint filers and $ 400,000 for single filers.
- Prohibit IRA contributions for taxpayers whose total retirement account balances exceed $ 10 million in the previous tax year.
- Require minimum distributions from IRAs with a balance greater than $ 10 million in the previous year.
- Elimination of Roth conversions for IRAs and 401 (k) plans (also known as Roth backdoor IRAs) for joint filers with taxable income greater than $ 400,000 and single filers with taxable income greater than $ 400,000.
Inheritance and gift taxes
- Halve the current inheritance and gift tax exemption of $ 11,700,000 and replace it with an exemption of approximately $ 6,000,000 per person (indexed for inflation).
- Elimination of valuation discounts for the transfer of non-business assets (passive assets held for the production of income and not used in the active conduct of a trade or business).
- Including the settlor’s irrevocable trusts in the settlor’s taxable patrimony.
- Treat sales between grantors and certain grantor trusts as sales between third parties (applicable only to trusts created and sales made after the date of enactment of the new law).
It is important to note that the current proposal does not include (i) a capital gains tax on death, (ii) a loss of the basic increase on death, (iii) a decrease in the exemption lifetime gifts (below the inheritance tax exemption), or (iv) an increase in the inheritance and gift tax rate above the current 40 percent.
Will the tax changes be retroactive or prospective?
Most of the proposed tax changes are expected to come into effect after December 31, 2021, with the exception of those mentioned above. Although retroactivity is generally disadvantaged, there is a precedent: the Revenue Reconciliation Act of 1993, signed on August 10, 1993, included certain tax increases retroactive to January 1, 1993.
While it is not yet certain whether the tax changes, if any, will be enacted into law, taxpayers would be well advised to take the House’s proposals into account in their tax planning.