The House Ways & Means Committee last week released proposed tax law changes being considered by Congress. Many of the provisions will be effective after December 31, 2021. One notable exception is the proposed change to the capital gains tax rate which would be effective for transactions after September 13, 2021.
One notable item not addressed is the current $10,000 limit on the deductibility of state and local taxes (SALT limitation).
Income Tax Changes
- The top marginal income tax rate would increase from 37% to 39.6% for married taxpayers filing joint returns with taxable income over $450,000; married taxpayers filing separate returns with taxable income over $225,000; and, single taxpayers with taxable income over $400,000
- The increase in tax rate would also apply to trusts and estates with taxable income over $12,500
- Imposition of a 3% tax surcharge applied to modified adjusted gross income in excess of $5 million; $2.5 million for a married individual filing separately
- Extension of the 3.8% net investment income tax to net investment income derived in the ordinary course of a trade or business for individuals with taxable income greater than $400,000; $500,000 for taxpayers filing a joint return
- No change to the limit on deductibility of state or local taxes
- Limitation of the qualified business income deduction to $500,000 for individuals filing a joint return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate
- Increase of the long-term capital gains tax rate from 20% to 25%, effective for transactions after September 13, 2021
- Permanently disallow deductions for excess business losses for non-corporate taxpayers However, taxpayers would be allowed to carry losses forward to the succeeding taxable year
- Change to the corporate tax rate to a graduated schedule of 18% on the first $400,000 of income, 21% on income up to $5 million, and 26.5% on income above $5 million; the graduated tax rates would be phased out on income above $10 million
Estate, Gift and Retirement Plan Changes
- Reduction in estate and gift tax exclusion to $5 million per individual, indexed for inflation
- Limitations on the use of Grantor Trusts in estate planning strategies
- Limitations on valuation discounts for certain transfers of nonbusiness assets
- Prohibit contributions to a Roth or traditional IRA for a taxable year for certain taxpayers if the total value of retirement accounts exceed $10 million at the end of the prior year
- Require a minimum distribution for certain taxpayers of 50% of the amount that retirement account assets exceed $10 million at the end of the prior year
- Prohibit investment of IRA assets in entities in which the account owner has a substantial interest
- Prohibit after-tax IRA contributions from being converted to a ROTH IRA
- Eliminate ROTH Conversions for certain high-income taxpayers
Other Business Provisions
- Allow, for two years beginning on December 31, 2021, the reorganization of any corporation that was an S corporation on May 13, 1996 to a partnership on a tax-free basis
- Extend to five years the three-year holding period required to qualify for long-term capital gains in connection with carried interests, except for real property trades or businesses, and taxpayers with less than an adjusted gross income of $400,000
- Elimination of the 75% and 100% exclusion for gains realized from the sale of certain qualified small business stock for taxpayers with Adjusted Gross Income greater than $400,000
- Extend the constructive and wash sale rules to cryptocurrencies as well as commodities and currencies
Cullari Carrico LLC remains committed to assisting our clients, friends and communities and has a dedicated tax team in place that can assist with any questions you may have. We invite you to contact us if you would like assistance in developing tax strategies for minimizing your overall tax burden during these difficult times.