Recent Tax Proposals Impacting Individuals and Estates
On September 13, 2021, The House Ways and Means Committee released proposed legislation including, among other changes, major revisions to taxation of individuals and estates.
The following is a summary of the most relevant items that could affect our clients and friends. Keep in mind that these are simply proposals. They are not law and may never become law. A lot will happen to change what if any of the following is enacted as legislation and signed into law by the president.
Unless otherwise noted below, the effective date is for taxable years beginning after December 31, 2021.
Individual Income Taxes
- Increase in Individual Tax Rates – the top marginal tax rate for individuals would be increased from 37% to 39.6% for single taxpayers with taxable income over $400,000, married filing joint with taxable income over $450,000, head of household with taxable income over $425,000, and married filing separate with taxable income over $225,000.
- Increase in Capital Gains Rates – the top capital gains tax rate for individuals would be increased from 20% to 25% for taxable income over $400,000, and effective as of the date of the proposal (September 13, 2021).
- New High-Income Surcharge – imposes an additional 3% tax for single or married filing joint taxpayers with modified adjusted gross income over $5 million, or $2.5 million for a married individual filing separately.
- Expansion of Net Investment Income Tax – the net investment income tax of 3.8% is to be extended to active business income for single taxpayers with taxable income over $400,000 and married filing joint with taxable income over $500,000, and to the extent not otherwise subject to employment taxes.
- Qualified Small Business Stock – reduces the 75% and 100% exclusion rates for gains realized from certain qualified small business stock to 50% for taxpayers with adjusted gross income of $400,000, and effective for sales and exchanges made after the date of the proposal (September 13, 2021).
- Limitation on Deduction of Qualified Business Income – sets the maximum allowable deduction at $400,000 for single taxpayer, $500,000 for married filing joint, and $250,000 for married filing separate.
- Limitation on Excess Business Losses – would permanently disallow excess business losses (i.e., net business deductions in excess of business income) of a non-corporate taxpayer from offsetting non-business income in a taxable year. Instead, non-corporate taxpayers whose losses are disallowed may carry them forward to the next succeeding taxable year subject to the excess business loss rules for such a year, rather than being carried over as a net operating loss (current law). The proposal would be effective for taxable years beginning after December 31, 2020 (i.e. retroactive to 1/1/21).
- Carried Interest – would extend the holding period for long-term capital gain attributable to carried interests from three to five years. The three-year holding period, however, will continue to apply with respect to certain real property trades or businesses and taxpayers with an adjusted gross income of less than $400,000 per year. The rules would apply to all assets that could give rise to long-term capital gain (that is, existing exclusions for certain specified items of long-term capital gain, such as Section 1231 gain, no longer would apply).
- Contributions to Individual Retirement Accounts – prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of the account exceeds $10 million as of the end of the prior taxable year and applies to single taxpayers (included married filing separate) with taxable income over $400,000, married filing joint with taxable income over $450,000, and head of household with taxable income over $425,000 and indexed annually for inflation.
- Increase in Minimum Required Distributions – requires minimum distributions when the combined IRA, Roth IRA and defined contribution account balances exceed $10 million at the end of a taxable year and applies to taxpayers with income levels as described above. Any combined excess above $20 million is required to be distributed 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.
- Restrictions on Certain Types of Investments in IRAs – prohibits investment in securities if the issuer requires the IRA-owner to have a certain level of educations, assets, or income. Prohibits investment in single-member LLCs where the owner has a 10% or greater interest, is an officer or a director of the entity, including entities owned by family members. Prohibits investment in domestic international sales corporations (DISCs) or foreign sales corporations (FSCs).
- Restrictions on Roth Conversions – eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, married filing joint with taxable income over $450,000, and head of household with taxable income over $425,000. Additionally, all after-tax (nondeductible) IRA contributions would be prohibited from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021, effectively eliminating what is commonly known as a backdoor Roth contribution.
- Temporary Provision to Allow Eligible S Corporations to Reorganize as Partnerships Without Tax – this proposed legislation would allow an eligible S Corporation (i.e., an S Corporation on May 13, 1996, and all times thereafter) to convert to a partnership without incurring tax on the deemed liquidation. This proposal would be effective for transactions occurring on or after December 31, 2021, and before January 1, 2024.
Trust and Estate Income Taxes