The long-anticipated tax proposals from the Ways and Means Committee in the House of Representatives were released on Monday, September 13, 2021. At this time, these are just proposals and must make it through the full legislative process to become law. As currently drafted, some of the proposals would become effective before the end of the year, including the date of introduction of the legislation (noted as September 13, 2021) for some provisions and the date of enactment for others. For this reason, these tax proposals should be taken into consideration when making business and personal financial decisions currently.
The proposed legislation is over 800 pages, so this summary is only intended to cover some of the highlights.
- Reintroduce a graduated rate structure for corporate income tax with a top rate of 26.5%. The rate would be 18% on the first $400,000 of taxable income, 21% on taxable income up to $5,000,000, and 26.5% on taxable income above $5,000,000. Corporations with taxable income exceeding $10,000,000, would receive no benefit of the graduated rate.
- Delay the requirement to capitalize research and development expenditures until 2026. The requirement to capitalize and amortize these expenditures rather than currently deducting them was put in place by the Tax Cuts and Jobs Act and is currently scheduled to become effective for tax years beginning after December 31, 2021.
- Modifications to a wide variety of tax rules governing U.S. taxation of international income, including changes to the rules, calculations, and applicable tax rates for GILTI, Subpart F, FDII, BEAT, Foreign Tax Credit utilization, and interest deductions for multinational businesses.
- Acceleration to 2022 of the expanded limitation on deduction of executive compensation exceeding $1,000,000 annually for publicly traded companies. These rules were scheduled to take effect after December 31, 2026.
- Substantial tightening of the rules for carried interest under §1061, including an increase in the required holding period to receive long term capital gain treatment from three years to five years, expanded applicability of the rule to include all income that is subject to tax at the capital gain rate (including qualified dividend income and §1231 gain), and other changes intended to prevent avoidance of the holding period rules.
- Modification of the §163(j) business interest deduction limitation to apply at the partner or S-corporation shareholder level rather than at the passthrough entity level, and limitation of the disallowed business interest expense carryforward to five years rather than indefinitely.
- Creation of significant new and expanded tax incentives for renewable energy, including a refundability option for certain tax credits
Individual Income Tax Proposals
- Increase the top rate on capital gains and qualified dividends from 20% to 25%. This rate increase is effective for calendar year 2021 but would only apply to dividends received and capital gain transactions occurring after September 13, 2021. There is an exception for transactions that are subject to a binding contract on or before September 13, 2021 that is not modified to be taxed at the lower 20% tax rate.
- Limit the Qualified Small Business Stock 75% and 100% exclusions to taxpayers with adjusted gross income (AGI) of less than $400,000. The 50% exclusion will still apply regardless of AGI. This change would apply to sales and exchanges on or after September 13, 2021.
- Increase the top marginal income tax rate from 37% to 39.6% and reduce the threshold to which it applies from $628,300 for married filing jointly (MFJ) filers and $523,600 for single filers to $450,000 (MFJ) and $400,000 (single) effective for tax years beginning after December 31, 2021.
- Expansion of income subject to the 3.8% Net Investment Income Tax to all income from passthroughs regardless of active participation for taxpayers with income greater than $400,000 (single) and $500,000 (MFJ) and for estates and trusts effective for tax years beginning after December 31, 2021.
- Limit the Qualified Business Income deduction (§199A) to $400,000 (single), $500,000 (MFJ), $250,000 for married filing separately (MFS) and $10,000 for estates and trusts effective for years beginning after December 31, 2021.
- Make permanent the disallowance of Excess Business Losses over $500,000 for tax years beginning after December 31, 2020 and treat carryover business loss as part of the subsequent year business losses instead of a net operating loss.
- Create a 3% tax surcharge on modified adjusted gross income over $5,000,000 for all individual taxpayers ($2,500,000 for MFS) and $100,000 for estates and trusts.
- Extend the monthly advance payments of the child tax credit through December 31, 2025.
Federal Estate and Gift Tax Proposals
- Reduce the unified credit for gift and estate tax back to $5,000,000 increased for inflation effective for gifts and estates of decedents after December 31, 2021.
- Increase the estate tax valuation reduction for certain real property used in farming or other trades or business from $750,000 to $11,700,000 for decedents dying after December 31, 2021.
- Change the estate and gift taxation of grantor trusts and sales to grantor trust on or after the date of enactment.
- Change the valuation rules for gifts of nonbusiness assets effective for gifts made after the date of enactment.
Retirement Plan Proposals
- Prohibit the contribution of assets to certain retirement plans if the value of the plans owned by the taxpayer exceeds $10 million and create a new minimum required distribution if the value of assets in IRA, Roth IRA and defined contribution accounts exceed $10 million and taxable income is over $400,000 (single) and $450,000 (MFJ) effective for tax years beginning after December 31, 2021. Additionally, distributions from Roth IRAs and designated Roth accounts in defined contribution plans are required if total retirement plan assets exceed $20 million.
- Disallow “back-door” Roth contributions effective December 31, 2021.
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