NOTE: These proposals will be highly debated in Congress. We want to simply make you aware of what is being proposed, and will keep you updated as these proposals progress through Congress.
On September 13, 2021, the House Ways and Means Committee released a draft of proposed tax changes.
By Andy Clark
The proposals differ compared to the tax provisions proposed by the Biden administration. Democrats intend to pass this legislation by using a budget reconciliation process that allows them to bypass Republican support. As these proposals will be highly debated in Congress, we will continue to provide guidance as changes occur.
Some highlights from the proposed tax changes include:
- Individual income tax: Increases the top individual income tax rate to 39.6% for every joint filer with income over $450,000 and every single filer with income over $400,000. The proposal would also enforce a 3% surtax on individuals with adjusted gross income of more than $5 million.
- Capital gains tax: Increases the top capital gains rate from 20% to 25%. This is a difference from the Biden administration proposal of 39.6% for the top rate. The proposal contains language that indicates that this change would be effective at the date of introduction, which would be as of Monday September 13, 2021. There is a special transition rule for deals with binding contracts in place before September 13, 2021 but haven’t been competed as of that date.
- Medicare taxes: The proposal also subjects active trade or business income in excess of $500,000 for a joint filers and $400,000 for single filers, to the 3.8% net investment income tax. Currently, this tax is only imposed on passive income. It is important to note that if this proposal passes capital gains arising from the sale of a pass-through business would be subject to this additional tax if the income thresholds were met.
- Qualified business deduction (otherwise known as the 20% deduction): The proposal would limit the maximum deduction to $500,000 for joint filers and $400,000 for single filers.
- Corporate tax: The proposal would revert back to a graduated rate structure. Currently, a flat rate of 21% is imposed; however, under the proposal tax rates would start at 18% on income up to $400,000, 21% on income up to $5 million and 26.5% on any income above $5 million.
- Estate and gift tax exemption: The proposal would half the current exemption amount allowed under the TCJA. Additionally, no mention was made to disallowing step up in basis on assets transferred at death.