Big Potential Tax Changes on the Horizon for Clients | Goulston & Storrs PC
The US House Ways and Means Committee released a budget reconciliation bill on September 13, 2021. The bill still has to go through many stages of the legislative process – including passage by the House full Representatives and the full Senate and signature by the President – before becoming law. However, the contents of the bill provide an overview of the types of tax law changes that the current Congress can pass.
The current bill is long and complex, but generally seeks to fund $ 3.5 trillion in new government spending in part through tax increases on businesses and the wealthy. Some of its highlights are below:
Personal Income Tax Rate Proposals
- The highest ordinary marginal rate for individuals would drop from 37% to 39.6% for single people with taxable income over $ 400,000 and for married people filing jointly with taxable income over $ 450,000. In addition to the above changes, an additional 3% surcharge would apply to people with adjusted gross income over $ 5,000,000. The surtax would also apply to a trust with adjusted gross income exceeding $ 100,000. These rate increases would take effect for tax years beginning after calendar year 2021.
- The maximum capital gains rate for individuals with taxable income greater than $ 400,000 for sole filers and greater than $ 450,000 for joint filers would also be reduced from 20% to 25%. Note that the increase would be effective from the date of filing of the bill (September 13, 2021), subject to certain vested rights clauses for transactions that are the subject of an enforceable contract concluded before that date and which end in 2021.
- Widening the 3.8% net investment income tax to cover net income earned in the ordinary course of a trade or business (e.g. Under this proposal, all taxpayer income above these thresholds (including income earned by S corporations) that are not subject to self-employment tax would be subject to net investment income tax.
- The deduction for qualifying business income under Section 199A of the Internal Revenue Code would be capped at $ 500,000 for individuals filing jointly and $ 400,000 for individuals filing individually.
- The holding period for deferred interest has been reduced from 3 to 5 years in order to obtain a capital gain treatment.
- The exclusion of QSBS (Qualified Small Business Equities) capital gains would be limited to 50%; currently, 100% of the gain on the sale of qualifying shares can be excluded up to a maximum of $ 10 million. This change would apply to people with gross income greater than $ 400,000 and would apply to sales after the date the bill was introduced.
Corporate and international proposals
- The maximum corporate tax rate would drop from 21% to 26.5% for corporations whose taxable income exceeds a threshold of $ 5,000,000. There would be a new lower bracket for corporations with income below $ 400,000.
- Interest deductions for domestic companies that are part of an international financial reporting group are limited to their proportional share of the total profits of the international financial reporting group in order to avoid profit splitting. Note that this provision would particularly affect the so-called leverage lock-in structures commonly used by foreign investors in US real estate who are currently able to circumvent the interest stripping limitations of Section 163 (j). .
- The GILTI (Global Intangible Low Tax Income) rate went from 10.5% to 21% (by reducing the section 250 deduction) and a country-by-country application of the GILTI regime.
- BEAT (Base Erosion Anti-Abuse Tax) adjustments, including rate increases to 10% for the next two years and 12.5% thereafter.
- FDII (Foreign-Derived Intangible Income) adjustments including reduction of the deduction from 37.5% to 21.875%.
Inheritance and gift tax proposals
- The exclusion from inheritance and gift tax and the tax exemption on jump generation transfers (GST) would be halved roughly from January 1, 2022. In 2021, every individual will benefit an inheritance and gift tax exclusion of up to $ 11.7 million; and a GST exemption. also $ 11.7 million.
- Changes to the rules governing transferor trusts, such as making the tax treatment of a transferor trust more closely follow its tax treatment. This would essentially result in the inclusion of the underlying assets in the settlor’s estate on death and potentially subject the assets of the trust to tax. This change would affect grantor trusts formed or funded, or additions to existing grantor trusts, after the date of enactment of the bill. The change would make transferor trusts difficult to use in the future and could have a particular impact on transferor trusts that receive regular contributions, such as insurance trusts. In addition, sales of grantor trusts to their owner would now be a taxable transaction.
- Changes in valuation methodologies, including limitation of valuation discounts on transfers of non-commercial assets.
- IRAs with balances greater than $ 10 million: Additional contributions to an IRA would be prohibited once the combined total value of an individual’s retirement accounts exceeds $ 10 million. The contribution limit would apply to single taxpayers with taxable income over $ 400,000 and to married taxpayers jointly filing with income over $ 450,000. People with retirement assets over $ 10 million would be required to make withdrawals.
The bill did not contain several elements that had already been discussed as potential changes in tax law, such as the elimination of exchanges under Section 1031, the increase in the base for valued assets held on death and the $ 10,000 limit on the state and local tax deduction (the SEL deduction).
The question remains whether this legislation will be adopted in its current form or not at all.