On Wednesday, September 15, the Ways and Means Committee of the U.S. House of Representatives passed draft legislation proposing tax changes. It is far too early to know which provisions of the legislation, if any, will make it into law. However, as these potential changes could have important consequences for taxpayers, HM&M is following this legislation closely and will update clients as more information becomes available. While the specifics can – and almost certainly will – change before the bill makes it to President Biden’s desk, the following high-level takeaways give us an indication of the types of impacts we can expect, if and when the law takes effect.
Please note that this is not an exhaustive list of the changes proposed in the legislation – of which the tax proposals alone total over 885 pages – but rather a sample of the key issues that might impact HM&M clients.
Impact to Individuals is Primarily to Taxable Income in Excess of $400,000
Although this number may change as the bill makes its way through the legislative process, the current proposals impacting individuals make many of the changes listed below only to those taxpayers with taxable income greater than $400,000 per year. This does not apply to all proposals, and also varies depending on filing status, but this threshold appears repeatedly in the proposed legislation.
Individual Income Tax Rate
The proposed legislation looks likely to increase the top marginal income tax rate for individuals, while at the same time lowering the taxable income level at which the higher rate would apply.
Corporate Income Tax Rate
The draft bill would replace the current flat corporate income tax rate of 21% with a graduated tax rate structure, based on the corporation’s taxable income.
Capital Gains Tax Rate
The maximum tax rate on capital gains is likely to increase under the new legislation.
Net Investment Income Tax
The Committee’s draft legislation expands the definition of “net investment income” to include income derived in the ordinary course of business and income attributable to the disposition of property earned outside of passive income, in addition to other income not currently considered net investment income. Although the final definition may change from this draft, an expansion of what is deemed net investment income seems to be in the works.
Qualified Business Income
The qualified business income (QBI) deduction would be capped under the proposed legislation, based on filing status. The maximum deduction would apply regardless of the type of business generating the QBI.
Additional Income Tax Provisions
The draft legislation also includes proposed changes which would reduce the Qualified Small Business Stock sale exclusion, increase the effective tax rates for certain types of foreign income, extend the holding period required to obtain long-term capital gains treatment for carried interest partners, make the excess business loss limitation permanent, impose a “surcharge” to modified adjusted gross income above a certain threshold ($5,000,000 for married filing jointly taxpayers in the current proposal) for high-income individuals, and make changes to certain transfers between grantor trusts and a deemed owner.
Estate and Gift Tax Provisions
In addition to the changes to the income tax laws listed above, the introduced legislation proposes reducing the estate tax basic exclusion amount to the pre-Tax Cuts and Jobs Act level (i.e., roughly half of the current amount), include grantor trusts in the gross estate of the deceased deemed owner, treat distributions from grantor trusts as completed gifts (unless distributed to the deemed owner or their spouse), and eliminate valuation discounts for estate and gift tax purposes on certain transfers of nonbusiness assets.
Provisions Related to Retirement Plans
Finally, the proposed legislation would prohibit contributions to applicable retirement plans for high-income individuals if the total value of the plan exceeds a threshold amount, require minimum distributions for high-income individuals – regardless of age – if the value of the retirement plan exceeds certain threshold amounts, amend the definition of a qualified Roth IRA rollover, eliminate so-called “back-door” Roth IRA conversions for high-income taxpayers, and prohibit certain types of investments from being held in IRAs.
We cannot stress enough how preliminary this information is. This legislation still needs to be finalized by the rest of the House of Representatives, where it will be further debated and amended before being voted on. A similar process will need to take place in the Senate, before a reconciliation committee works to bring the House and Senate bills into agreement with each other. Once this reconciled legislation is then approved by both houses, it will go to the President for his signature. At every step along the way, we can expect changes to any or all of the above, or even new provisions not in the current bill. Of course, another scenario is that if the legislation fails to be reconciled and dies before it makes it to the President’s desk, the status quo will be maintained.
However, we are watching these developments closely, and will work to keep you as informed as the rapidly changing environment allows.
If you have any questions, please contact your HM&M advisor.
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