Budget Reconciliation Proposals Released by House Ways and Means Committee
Last week the House Ways and Means Committee released their proposals for budget reconciliation. As anticipated, the proposals included various tax increases to offset spending. Key items in the proposals are outlined below. Please note this is not a comprehensive list and the proposals do include many other items you may want to discuss with your advisor.
Individuals
- Increase the top marginal tax rate to 39.6% for taxable years beginning after December 31, 2021. For individuals this top bracket would start at taxable income levels greater than $400,000 for those filing single, $450,000 for those married filing joint, $425,000 for those filing head of household, and $225,000 for those married filing separate. The top rate would kick in for trusts and estates with taxable income over $12,500.
- The 3.8% net investment income tax would apply to all pass-through income (whether passive or non-passive) for taxable years beginning after December 31, 2021 for taxpayers with taxable income levels greater than $400,000 for those filing single and $500,000 for those married filing joint. This would also apply to trusts and estates.
- Create a new 3% surtax for taxable years beginning after December 31, 2021 on individuals with modified adjusted gross income greater than $5,000,000, or $2,500,000 for those married filing separate.
- Increase the top capital gains tax rate to 25% with an effective date of September 13, 2021. Transactions completed on or before September 13, 2021, or those with a binding written contract by that date (even if closing is after) would be subject to the current 20% top capital gains tax rate (if in the top bracket).
- Limit the §199A qualified business income deduction for taxable years beginning after December 31, 2021 to $500,000 for those married filing joint, $250,000 for those married filing separate, and $400,000 for those filing single. The trust and estate limit would be $10,000.
- Amend §461(l) to permanently disallow excess business losses for taxable years beginning after December 31, 2021. Excess business losses disallowed would be allowed to carry forward to the next taxable year.
- Cut the estate and lifetime gift exemption from the current $11,700,000 to an inflation adjusted $5,000,000 (i.e., greater than $5,000,000 after inflation). This would apply to estates for decedents passing and gifts made after December 31, 2021.
C-Corporations
- Revert the tax rate back to a graduated structure. The tax rate would be 18% on taxable income up to $400,000, 21% on taxable income above $400,000 up to $5,000,000, and 26.5% on taxable income above that. This rate structure would apply for taxable years beginning after December 31, 2021.
Retirement plans
- Prohibit contributions to a Roth or traditional IRA for taxable years beginning after December 31, 2021 if the total value of an individual’s IRA and other defined contribution retirement accounts generally exceed $10,000,000 at the end of the prior taxable year. The limit on contributions would apply to single or married filing separate taxpayers with taxable income over $400,000, married filing joint taxpayers with taxable income over $450,000 and those filing head of household with taxable income over $425,000. All taxable income amounts would be indexed for inflation.
- For taxable income above those levels mentioned in the previous point, a minimum distribution would be required the following year for individuals whose combined Roth IRA, traditional IRA and defined contribution retirement plans generally exceed $10,000,000 at the end of the taxable year effective for taxable years beginning after December 31, 2021. The minimum distribution is generally 50% of the prior year combined value that exceeds $10,000,000.
- For those with combined Roth IRA, traditional IRA and defined contribution retirement plans more than $20,000,000, the excess must be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of the amount needed to bring the combined total down to $20,000,000 or the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. This would apply for taxable years beginning after December 31, 2021.
- Close the “back-door” Roth IRA strategy. For those with taxable income above those levels mentioned in the first point under this section no Roth conversions would be allowed for IRAs and employer-sponsored plans. This would be effective for distributions, transfers, and contributions made after December 31, 2031. Additionally, regardless of income level, all employee after-tax contributions in qualified plans and after-tax IRA contributions would be prohibited from being converted to Roth for distributions, transfers, and contributions made after December 31, 2021.
Other business provisions
- The three-year holding period would generally be extended to five years for long-term capital gain treatment for long-term capital gains passed through partnerships which are held in connection with the performance of services (i.e., carried interest) for taxable years beginning after December 31, 2021. This change would not apply to real property trades or businesses and taxpayers with adjusted gross income less than $400,000.
- Extend the constructive sale rules under §1259 and wash sale rules under §1091 to apply to cryptocurrencies for taxable years beginning after December 31, 2021. The wash sale rules would also be extended to commodities and currencies.
- Special 75% and 100% exclusion of gain realized from qualified small business stock under §1202 would not apply for taxpayers with adjusted gross income of $400,000 or greater, for sales and exchanges after September 13, 2021 unless there is a binding written contract by that date. The 50% exclusion would remain available to all taxpayers.
The Senate has also been working on its own proposed tax reforms to include in a reconciliation bill which Senate Finance Committee Chair Ron Wyden has released in a series of proposed legislation. More to come on that in another article soon. Stay tuned.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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