The House Ways and Means Committee recently released legislation proposing to increase taxes on corporations and certain taxpayers.
Here’s what you need to know about the potential tax increases.
The proposed legislation creates a graduated rate structure for the corporate income tax. The first $400,000 of corporate taxable income is taxed at 18%. Taxable income from $400,001 to $5 million is taxed at 21%. Taxable income above $5 million is taxed at 26.5%.
The graduating rate levels will phase out for corporations making more than $10,000,000. Also, personal services corporations are taxed at a flat 26.5% on all taxable income. These changes would take effect for taxable years beginning after December 31, 2021.
The proposed legislation increases the top marginal individual income tax rate to 39.6%. This rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021.
The legislation also expands the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers. This applies to those with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates. This section of the legislation would apply to taxable years beginning after December 31, 2021.
The legislation creates a 3% tax on modified adjusted gross income above $5,000,000 (or in excess of $2,500,000 for a married individual filing separately). The effective date for this provision is taxable years beginning after December 31, 2021.
The legislation does NOT include a change to the cap on the State and Local Tax Deduction. A press release from Ways and Means Chairman Richard Neal (D-Mass.), Oversight Subcommittee Chairman Bill Pascrell, Jr. (D-N.J.) and committee member Tom Suozzi (D-N.Y.) states the committee will address this issue at a later date.
The proposed legislation increases the maximum capital gains rate to 25% for taxpayers subject to the maximum individual rate on ordinary income. The 25% rate is proposed to be effective as of September 13, 2021.
The legislation amends section 199A by setting the maximum allowable deduction at $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. Existing limitations on specified service businesses are retained. The effective date for this section of the bill is taxable years beginning after December 31, 2021.
The legislation seeks to terminate the temporary increase in the unified credit against estate and gift taxes, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation since 2010. This provision applies to estates of decedents dying and gifts made after December 31, 2021.
The legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts exceeds $10 million as of the end of the prior taxable year. This provision would be effective for tax years beginning after December 31, 2021.
If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances exceeds $10 million at the end of a taxable year, a minimum distribution would be required for the following year for certain taxpayers.
The legislation also eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision would be effective for years beginning after December 31, 2031.
The legislation includes several provisions modifying existing rules that limit the ability of domestic taxpayers to recognize income in low tax jurisdictions and the ability of foreign taxpayers to avoid U.S. taxation on U.S. income.
The House Ways and Means Committee will hold a meeting on September 15th to debate and amend the tax provisions in Subtitle I of the proposed legislation.
The Committee also held a meeting on September 14th to debate and amend the other Subtitles in the bill. This meeting focused on:
The provisions to be approved by the House Ways and Means Committee are anticipated to be a part of a budget reconciliation bill that Congressional Democrats seek to enact. (The Committee last week approved other provisions, a summary can be found here.)
The House Ways and Means Committee is not the only House committee drafting legislation for the budget reconciliation bill. Currently, the goal is for all the House committees to complete their bills by September 15 and submit them to the House Budget Committee where they will be combined into one piece of legislation. That legislation will then be the subject of a House floor vote.
House Democratic leaders want a floor vote on the budget reconciliation bill by September 27th so that the chamber can also vote on the $1.2 trillion Bipartisan Infrastructure Bill, which has already passed the Senate. More information on the infrastructure bill is here.
At this point, it is not clear if House Democrats have enough votes to pass the budget reconciliation bill or the $1.2 trillion Bipartisan Infrastructure Bill. The reason: passage of one bill depends on the passage of the other and House Democrats disagree on which bill should be voted on first.
A lot of issues remain unresolved when it comes to the budget reconciliation bill. Congressional Democrats are the only members expected to support it and lawmakers within that group have disagreements over tax rate increases and which tax provisions should receive an increase.
This means changes to this legislation and the inclusion of other tax provisions are possible.
Have questions on how this new legislation will impact your organization?
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.