Source: Newburg | CPA Tax Brief (9/14/21)
On Monday September 14th, The House Ways and Means Committee unveiled details to their proposed tax legislation changes. We have summarized some of the more pertinent details within the proposal below. NOTE: These proposals may still be subject to significant change as they require passing both the House and the Senate along with signatures by the President to become law.
- Top marginal tax rate would rise from 37% to 39.6% starting in 2022. This highest marginal tax rate would be applicable to single individuals with $400,000 or more of taxable income, married couples with $450,000 or more of taxable income, and head of household filers with $425,000 or more of taxable income.
- Capital Gains rate would rise to 25% (from 20%)
- Integrate a new 3 percent surtax on individuals with modified adjusted gross income exceeding $5 million ($2.5 million for a married individual filing separately). Note that this provision was not included in the president’s proposals.
- Expand the 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 filer) or $500,000 (joint filer), as well as for trusts and estates
- Limit the maximum 20% qualified income deduction (§199A) to $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate.
- The amendments made by this section apply to taxable years beginning after December 31, 2021
- This provision amends section 461(l) to permanently disallow excess business losses (i.e., net business deductions in excess of business income) for non-corporate taxpayers. The provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year
- Terminates the temporary increase in estate and gift exemption, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation
- Top tax rate would increase to 26.5% (from 21%)
- 18% on the first $400k, 21% on income up to $5M and 26.5% on income thereafter
- Personal services corporations are not eligible for graduated rates
- Minimum tax on US Companies foreign income would increase to 16.6% (from 10.5%)
- The legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year.
- 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, required minimum distribution (RMD) would be required for the following year. The 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.
- 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).
- A new annual reporting requirement for employer defined contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported.
- Dual capacity taxpayers are U.S. companies that are both subject to levy in, and receive certain benefits from, a foreign country or possession of the United States. To ensure dual capacity taxpayers cannot claim foreign tax credits for payments that are not deemed to be income taxes, this section provides that any amount paid by a dual capacity taxpayer to a foreign country will not be considered a tax to the extent it exceeds the generally applicable income tax of that country.
- Backup withholding and Third-Party Network Transactions for 1099s – adds that the aggregate number of annual transactions between the third-party settlement organization and the payee exceeds 200 starting in 2022
- Accelerates termination of employer credit for wages paid to employees during family and medical leave to taxable years beginning after 2023
- Requiring the amortization of the research and experimental expenditures starting taxable years beginning after December 31, 2021. Under this provision, the amortization of research and experimental expenditures will begin for amount paid or incurred in taxable years beginning after December 31, 2025.
- Modification of Rules for Partnership Interests Held in Connection with the Performance of Services. – Changes holding period of partnership interest from three to five years to qualify for long term gain for those with AGI greater than 400K. The provision applies to taxable years beginning after December 31, 2021.
- Limitation on Certain Special Rules for Section 1202 Gains. – This provision amends section 1202(a) to provide that the special 75% and 100% exclusion rates for gains realized from certain qualified small business stock will not apply to taxpayers with AGI equal or exceeding $400,000. The baseline 50% exclusion in 1202(a)(1) remains available for all taxpayers. The amendments made by this section apply to sales and exchanges after September 13, 2021, subject to a binding contract exception.