Earlier this week, the House Ways and Means Committee released legislative text for proposed tax changes which are set to pass through a process called reconciliation -- meaning instead of needing 60 votes in the Senate to become law, they’ll only need a simple majority. If that happens, corporations and individuals will see higher tax rates and a slew of other changes to the Internal Revenue Code. Below, you’ll find a quick rundown of the ones we think most important. As always, we’ll be sure to cover these in our live weekly webinar, too, so be sure to join us.
For corporations and businesses:
- Increased and graduated corporate tax rate: The proposal would replace the current flat 21% corporate tax rate with a graduated rate, starting at 18% on the first $400,000 of income; 21% on income up to $5 million; and 26.5% on income above $5 million. The graduated rate would phase out for corporations with income greater than $10 million.
- Limited interest deduction: The proposal would limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense. The interest limitation would apply only to domestic corporations for which the average excess interest expense over interest includible over a three-year period exceeds $12 million.
- Carried interest and capital gains: The proposal would generally extend from three to five years the holding period required for gain attributable to an applicable partnership interest to qualify for long-term capital gain treatment. The three-year holding period for real property trades or businesses and taxpayers with an adjusted gross income (AGI) less than $400,000 would be retained. The proposal also would extend Sec. 1061 to all assets eligible for long-term capital gain rates.
- Treatment of Sec. 1202 stock:The special 75% and 100% exclusion rates for gains realized from certain qualified small business stock would not apply to taxpayers with AGI equal to or exceeding $400,000 under the new proposal. The baseline 50% exclusion in Sec. 1202(a)(1) would remain available for all taxpayers.
- Early end of credit for paid family leave and medical leave: The proposal would end the employer credit for wages paid to employees during family and medical leave to tax years beginning after 2023 (currently 2025).
- S corporation reorganization without tax: The proposal would allow eligible S corporations to reorganize as partnerships without triggering tax.
- Increase in work opportunity tax credit: The proposal would increase the work opportunity tax credit to 50% for the first $10,000 in wages, through Dec. 31, 2023, for all WOTC targeted groups except for summer youth employees.
- Increase in top marginal tax rates: Under the proposal, the top marginal rate for married couples filing jointly, with taxable income over $450,000, would increase to 39.6%. This top rate would also apply to heads of household 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.
- Increased tax rate on capital gains: The proposal would increase the tax rate on capital gains to 25% (the current statutory rate of 20% would continue to apply to gains and losses for the portion of the tax year prior to the date of introduction). Gains recognized later in the same tax year that arise from transactions entered into before the date of introduction pursuant to a written binding contract would be treated as occurring prior to the date of introduction.
- Expansion of net investment income tax: The proposal would expand net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filers) or $500,000 (joint filers), as well as for trusts and estates.
- Changes to qualified business income deduction: The proposal would set the maximum allowable deduction at $500,000 for joint returns, $400,000 for individual returns, $250,000 for a married filing a separately returns, and $10,000 for trusts or estates.
- Limitation on excess business losses:The proposal would permanently disallow excess business losses (i.e., net business deductions in excess of business income) for noncorporate taxpayers.
- High-income surcharge: The proposal would impose a tax equal to 3% of a taxpayer's modified AGI (MAGI) in excess of $5 million (or in excess of $2.5 million for a married individual filing separately). For this purpose, MAGI would mean AGI reduced by any deduction allowed for investment interest (as defined in Sec. 163(d)).
- Reversion of unified credit: The proposal would revert the unified credit against estate and gift taxes to $5 million per taxpayer, adjusted for inflation.
- Changes to contributions to IRAs: The proposal would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual's IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions would only apply to 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 household with taxable income over $425,000 (all indexed for inflation).
- RMDs: For high-income taxpayers (as outlined above), if an individual's combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. That minimum distribution would generally be 50% of the amount by which the individual's prior-year aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit. If the combined balance amount in such accounts and defined contribution plans exceeds $20 million, that excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.
- Elimination of Roth conversions: The proposal would eliminate 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 household with taxable income over $425,000 (all indexed for inflation).
This is a lot to digest. Please feel free to reach out to us with any questions, and click the link below to join our live discussion on this issue.