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House Ways and Means Democrats Proposed Tax Changes

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House Ways and Means Democrats Proposed Tax Changes

Details regarding tax increases needed to fund infrastructure and social safety net changes are beginning to emerge.  House Ways and Means Democrats have released text with includes, among many other things, increases in corporate and individual tax rates.

Corporate tax rates will increase from 21% to 26.5%.  There are actually tax rates of 18%, 21% and 26.5% although personal service corporations would only be taxed at the 26.5% rate and the lower rates would phase out for corporations with income exceeding $10 million.  This is something of a compromise between the Biden administration proposal of 28% and top rate of 25% that some Senate Democrats were seeking.

For years after 2021, the top marginal rate for individuals would increase from 37% to 39.6% as expected.  This increase would apply to married individuals filing jointly with taxable income of over $450,000.00 and unmarried individuals with taxable income over $400,000.00.  In addition, there would be a surtax of 3% of a taxpayers modified adjusted gross income in excess of $5 million for married couples filing jointly and for trusts and estates.

The 20% capital gains tax would be increased to 25% for gains recognized in tax years ending after September 13, 2021 (meaning this year).  However, for transactions that have concluded before September 13, the 20% rate would still apply.  Also, 20% capital gain rate will continue to apply for gains recognized in 2021 but after September 13th from transactions that were entered into before September 13th pursuant to a written binding contract.  Historically, increases in capital gains rates have been prospective with the objective of collecting some additional tax revenue from taxpayers anxious to generate their capital gains prior to the increase in rate so this effective date is a bit unusual, and we may yet see a change there.

The Net Investment Income tax of 3.8% under Section 1411 of the Internal Revenue Code (sometimes referred to as the Obamacare Tax) will continue and would apply to many capital gain transactions.  In fact, the provisions of Section 1411 would be expanded to cover ordinary course of trade or business income for taxpayers with income greater than $500,000.00 for married individuals filing jointly and $400,000.00 for single filers as well as for trusts and estates.  The expansion of the net investment income tax would apply to taxable years beginning after 2021.

Other changes to individuals include limiting the maximum allowable deduction under Code Section 199A to $500,000.00 in the case of taxpayers filing joint returns, and $400,000.00 for an individual return, and $10,000.00 for a trust or estate.  Those changes apply for taxable years after December 31, 2021.  Also, Section 461(l) which limits the ability of non-corporate taxpayers to report losses in excess of $500,000.00 for joint filers and $250,000.00 for individuals, would be made permanent.  Although, there has a great deal of lobbying for an increase in the deduction for state and local taxes, the proposal does not include any increase in such amounts which are capped at $10,000.00.

Estate taxes are also impacted under the proposals First, the bill would terminate the temporary increase in the estate tax exemption amount (that was placed in the law as part of the 2017 Tax Cut and Jobs Act), reverting it to its 2010 level of $5 million per individual, indexed for inflation.   Note that this change is effective after 2021 so that taxpayers wishing to utilize the current exemption ($11.7 million) must act prior to end of the year.  The exemption in 2022 would be projected to drop to $5,850,000 plus a 2021inflation adjustment.  Second, other estate planning techniques affected include limiting the ability of selling assets to a “grantor trust” (a trust deemed to be the alter ego of its grantor) without incurring an income tax.  Unlike current law, the bill would include any grantor trust in the grantor’s estate for estate tax purposes and the bill would limit the ability to take valuation discounts when a taxpayer transfers non-business assets.  The new rules for grantor trusts may allow a limited opportunity to fund existing trusts before enactment to avoid their application .On the positive side, the proposals do not include the elimination of the “step-up in basis” provisions that apply to capital assets included in the estate of deceased individuals, and they do not provide for treating transfers at death or by gift as being subject to income tax as had been proposed in the May 28, 2021 Treasury Department proposal called the “Green Book”.  In other words, there are no changes to the current “basis” rules for property transferred by gift or at death.

There are numerous other provisions in the 881 pages (those are the tax increases only, the Bill has a total of 1872 pages) released covering everything from payroll credit for compensation to local news journalists to increasing excise taxes on cigarettes, small cigars, and a roll-your-own tobacco.  The Committee is right now involved in marking up the provisions but what has been proposed provides a glimpse into what the future may look like for corporate and personal income taxes.

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