On Monday, September 13, 2021, House Ways and Means Committee Chairman Richard Neal released proposed tax changes pursuant to the “Build Back Better” reconciliation bill. These proposals are scheduled to be considered in Committee on Wednesday, September 15, 2021. The proposed tax increased are projected to raise federal revenue by more than $2 trillion over a 10-year period.
Notably, some proposals included in President Biden’s Green Book (see our post here) are omitted, some have been modified in Committee, and other provisions are new. Most of the changes would be applicable for tax years beginning after December 31, 2021.
Some of the significant proposals include:
- Increasing the top income tax rate for individuals from 37% to 39.6%, and reducing the income threshold at which the top tax rate kicks in to $400,000 for single tax payers and $450,000 for married taxpayers filing jointly, respectively. Heads of households with taxable income over $425,000 and married individuals filing separately with taxable income over $225,000 will also be subject to the top tax rate, as will estates and trusts with taxable income over $12,500. These are lower income thresholds than President Biden had proposed.
- Replacing the corporate income tax rate – currently a flat 21% – with a graduated rate, starting at 18% for the first $400,000 of a business’s taxable income, increasing to 21% for taxable income above $400,000 and up to $5 million, and 26.5% for taxable income over $5 million. President Biden had proposed increasing the corporate tax rate to 28%.
- Raising the top tax rate on capital gains from 20% to 25%, effective for transactions entered into after September 13, 2021 (the “date of introduction”). Gains realized after this date, but made pursuant to a written contract entered into prior to September 13 would be eligible for treatment under the prior tax rate of 20%.
- Instituting an additional 3% surtax on single individuals and households with modified adjusted gross income (MAGI) of over $5 million. Married individuals who file separately with MAGI over $2.5 million, and estates and trusts with MAGI over $100,000, would be subject to the surtax.
- Prohibiting further contributions to a Roth IRA or traditional IRA if, at the end of the prior tax year, the total value of the individual’s IRA and defined contribution retirement accounts exceeded an aggregate $10 million. This limit on contributions would apply to single taxpayers and married individuals filing separately whose taxable income exceeded $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000. This bill does not prohibit contributions to a Roth 401(k) based upon the above limits.
- Mandating required minimum distributions (RMDs) for taxpayers with taxable incomes as described in the point above. If an individual’s combined IRA and defined contribution retirement accounts are in excess of $10 million, an RMD of (generally) 50% of the amount by which the value of such accounts exceeded $10 million at the end of the prior year would be mandated. Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72, an increase ushered in by the Secure Act. Secure 2.0 increases the RMD age further to 73 starting on January 1, 2022; to 74 starting on January 1, 2029; and 75 starting on January 1, 2032.
- Eliminating the option of Roth conversions for single taxpayers (or 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.
- Accelerating the expiration of the current estate and gift tax exemption from December 31, 2025 to December 31, 2021. The combined per-person exemption would revert to the 2010 level of $5 million, indexed for inflation.
It remains to be seen whether the “Build Back Better” legislation can be passed, even via reconciliation, without alteration. There has been pushback on some of the proposals – and on the overall $3.5 trillion price tag – from both sides of the aisle.
However, while in some respects the Committee Chairman’s proposals are more modest than what was originally proposed by President Biden, the above would, if passed into law, represent tremendous changes to the U.S. Tax Code.
If you have questions as to how this House proposal, if enacted, might affect you and your business, please click here to email me directly – my team and I are here to help.
Until next time –