US House Proposed Tax Changes
The US House Ways and Means Committee recently released their proposals for tax increases. The tax proposals are projected to raise about $2.2 trillion over the next 10 years. The proposals would repeal many of the tax changes made in the 2017 Tax Cuts and Jobs Act, particularly for individuals with income of more than $400,000. The following is a summary.
The proposed tax increases are aimed at high income individuals, high net worth individuals and profitable C corporations. The focus of any tax planning for targeted individuals and profitable businesses should include taking steps to accelerate taxable income into this year and to use the lifetime gift and estate tax exemption before the end of the year. Keep in mind these are only proposals. Any enacted tax changes could be different. We will continue to monitor any changes that arise.
Currently, most of the proposed tax increases would be effective January 1, 2022. However, the increase to the capital gains tax rate would be effective for gains realized after September 13, 2021 (unless a legally binding contract was in place prior to that date), and certain gift planning strategies involving the use of grantor trusts and certain valuation discounts would be reduced as of the date of enactment.
Here is a short list of key provisions we believe would have the most impact on our clients:
Increase the top marginal individual income tax rate to 39.6% from 37% for taxable income above $400,000.
Increase the top capital gains rate to 25% for those with income above $400,000, effective for gains realized on or after September 14, 2021.
Expand the 3.8% net investment income tax to include net income from a trade or business for those earning $400,000 or more.
Add a new 3% surtax for those earning $5 million or more.
Limit the Qualified Business Income (QBI) tax deduction to a maximum deduction of $400,000 for individuals and $500,000 for married couples.
Increase the holding period from 3 to 5 years for applicable partnership interests for long term capital gain treatment of carried interests.
Limit Qualified Small Business Stock (QSBS) treatment, which excludes capital gain up to $10 million or 10x basis from federal income tax, for those earning income above $400,000 and for all estates and trusts effective for gains realized on or after September 14, 2021.
Impose limitations on retirement contributions for IRAs in excess of $10 million and accelerate required distributions from such accounts.
Increase the top corporate income tax rate from 21% to 26.5% for taxable income over $5 million and lower the rate to 18% on the first $400,000 of taxable income.
Increase IRS funding over the next 10 years to enhance tax enforcement.
Accelerate the sunset of the temporary increase in the gift and estate tax exemptions so that current exemptions of $11.7 million per person would be reduced to around $6 million per person effective January 1, 2022 (or the date of enactment) instead of January 1, 2026.
Reduce the ability to use grantor trusts (irrevocable trusts for which the grantor pays the income taxes) to avoid gift and estate taxes as of the date of enactment.
Eliminate the ability to use valuation discounts on gifts and bequests of non-business assets effective after the date of enactment.
This is only a brief summary of some of the proposed changes. For the full report click the link below.
Please contact us if you would like to discuss how these proposed changes could affect your taxes.