Proposed Tax Changes are Coming!

The House Ways and Means Committee recently released proposed tax changes to be incorporated in the budget reconciliation bill known as the "Build America Back Better" act. The proposal would raise taxes for corporations and individuals and make many other changes to the Internal Revenue Code. Here are some of the highlights of the proposed changes.

Corporations and businesses

Tax rate: The proposed act would replace the current flat 21% corporate tax rate with a graduated rate. It would start at 18% on the first $400,000 of income; 21% on income up to $5 million; and 26.5% on income above $5 million. However, the graduated rate would phase out for corporations making more than $10 million.

Sec. 1202 stock: The proposal would provide that the special 75% and 100% exclusion rates for gains realized from certain qualified small business stock would not apply to taxpayers with AGI equal to or exceeding $400,000. The baseline 50% exclusion in Sec. 1202(a)(1) would remain available for all taxpayers.

Individuals

Tax rates: The proposal would increase the top marginal individual income tax rate to 39.6%. This marginal rate would apply to married individuals filing jointly with taxable income over $450,000; to heads of household with taxable income over $425,000; to unmarried individuals with taxable income over $400,000; to married individuals filing separate returns with taxable income over $225,000; and to estates and trusts with taxable income over $12,500. It appears the marriage penalty is coming back! So will we see some tax planning divorces in the future I wonder?

Capital gains: The proposal would increase the 20% tax rate on capital gains to 25%. A transition rule would provide that the current statutory rate of 20% would continue to apply to gains and losses for the portion of the tax year prior to Sept. 13, 2021. Gains recognized later in the same tax year that arise from transactions entered into before Sept. 13, 2021, pursuant to a written binding contract would be treated as occurring prior to Sept. 13, 2021. It’s time to pony up for profits on your stock and investment gains! To be fair however, there are some arguments for why we even have a different rate on capital gains and ordinary income. Why do we tax income differently whether on a W2 or a stock gain?

Net investment income tax: The proposal would expand the Sec. 1411 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 filers) or $500,000 (joint filers), as well as for trusts and estates. This one is just double taxation at its best folks. So now the profits from my business are not only going to be subject to federal taxes, but also investment income taxes if greater than $400,000.

Qualified business income deduction: The proposal would set the maximum allowable deduction under Sec. 199A at $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. So here we go again with the marriage penalty…Pay attention divorce attorneys!

Limitation on excess business losses: The proposal would amend Sec. 461(l) to permanently disallow excess business losses (i.e., net business deductions in excess of business income) for noncorporate taxpayers. This is going to impact all taxpayers who file a schedule C, E or F to report their business income and have a loss. Be sure to speak with us on this matter, as it’s a little complicated.

Unified credit: The proposal would revert the unified credit against estate and gift taxes to $5 million per taxpayer, adjusted for inflation. See our newsletter last week on this topic!

Retirement plans

Contributions to IRAs: The proposal would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual's IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions would only apply to 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). There are just so many marriage penalties throughout this proposal!

Required Minimum Distributions or “RMD’s”: For high-income taxpayers, as defined in the preceding paragraph, 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, a minimum distribution 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. To the extent that the combined balance amount in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20 million, that excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans 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.

Roth conversions: 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). Why so many marriage penalties!

Some other key provisions

Paid family leave and medical leave: The proposal would kill the employer credit for wages paid to employees during family and medical leave to tax years beginning after 2023, instead of the current 2025 expiration date.

Work opportunity tax credit:The proposal would increase the work opportunity tax credit to 50% for the first $10,000 in wages, through Dec. 31, 2023, for all WOTC targeted groups except for summer youth employees. This is the one gem I see in this proposal!

The questions are endless, but here at Interactive Accountants, we want our clients to be informed of what is happening in the tax world!

If you would like to discuss this topic, book a free 30 minutes consultation with our owner Matthew Shiebler, CPA. He’s been practicing accounting for over 25 years now and is a business owner, just like you!