Things are heating up in Congress as leaders are working hard to complete their new tax legislation in the coming weeks. House Democrats released their proposal earlier this week, which includes tax hikes on big corporations and the wealthy to fund President Biden’s $3.5 trillion reconciliation package.
While the package includes many expected, significant tax increases, it falls short of President Biden’s original proposal in some areas.
Here’s a brief overview of what the House has proposed. Keep in mind that this is only a starting point for further negotiations and would also have to be agreed upon by the Senate, which has very different opinions.
House Democrats Proposed Tax Increases
- Corporate Tax: Increase the corporate tax from the current flat rate of 21% to 26.5%, which is less than the 28% that President Biden proposed. This would only apply to companies with taxable income over $5 million. A new lower rate of 18% would apply on the first $400,000 of income and 21% on income up to $5 million. These changes would take effect in 2022.
- Individual Tax: Increase the top individual income tax rate from 37% to 39.6% while enforcing a 3% surtax on taxpayers with adjusted gross income over $5 million. The new tax rate would take effect in 2022 for married individuals filing jointly with income over $450,000 and for single taxpayers with income greater than $400,000. Some of the lower graduated tax rates would be flattened, which gets taxpayers to the higher rates sooner.
- Qualified Business Income Deduction: Currently, many owners of partnerships, S corporations, trusts, and sole proprietorships are eligible for a Qualified Business Income Deduction of up to 20% of qualified business income. Under the proposal, this deduction would be limited for certain high-income earners starting in 2022. The maximum deduction allowed would be $500,000 for married taxpayers filing jointly, $400,000 for single filers, and $10,000 for trusts and estates.
- Capital Gains Tax: Increase the top capital gains tax rate from 20% to 25% (up to 28.8% by including the 3.8% net investment income tax (NIIT tax)), a significant decrease from the 39.6% proposed by President Biden. This new rate would affect those with taxable income greater than $450,000 for married filing jointly and $400,000 for single filers. Please note that the proposal makes this increase effective as of Monday, September 13, 2021, with special transition rules for deals with binding contracts that have yet to be completed.
- Estate and Gift Tax: The current estate and gift tax exemption is $11.7 million (total of $23.4 million for a married couple). The proposal would cut this exemption in half starting in 2022, which is four years earlier than set to occur under the Tax Cuts and Jobs Act. The proposal also limits some estate planning techniques, disallowing certain valuation discounts on “passive” or “nonbusiness” assets gifts.
- Cryptocurrency: The proposal includes cryptocurrency in general tax rules, aiming to treat it the same as other financial instruments and prevent individuals from abusing the rules.
Making the Complex, Changing Tax Laws Simple, For You
Two items were notably absent from the proposal: no changes have been proposed to the “step-up in basis” for property held by a decedent and there is no removal or modification to the $10,000 limit on state and local taxes (SALT). While we are far from any type of agreement, we want to share what’s out there and what the latest proposals contain.
As always, your team at MGA will continue to follow the development of these proposals and keep you updated along the way — always working hard to make the complex simple.
Have questions? Let’s talk!