Sep 27 Tax Alert: Proposed Changes to Individual, Business, Estate and Trust Taxes

On September 13, 2021 the House Ways and Means Committee released its sweeping tax proposals to be considered by Congress. These proposals are likely to change throughout the legislative process.  Below are several important highlights from the proposals to be aware of as taxpayers:

Individuals:

• Raises the top individual income tax rate to 39.6%
• Increases the capital gains and qualified dividend rate for certain “high-income” individuals to 25% on transactions occurring after September 13, 2021
• Imposes a 3% surtax on individuals with adjusted gross income of more than $5,000,000
• Expands the 3.8% net investment income tax to include most trade or business income
• Limits the qualified business income deduction for certain high-income taxpayers
• Bars taxpayers from claiming wash sales losses on digital assets such as cryptocurrency
• Expands the child tax credit
• Limits Individual Retirement account contributions and eliminates Roth conversions for high-income taxpayers
• Excess business loss limitation is made permanent, and losses will be carried forward to offset future net business income

Businesses:

• Changes the corporate income tax rate from a flat 21% to graduated rates ranging from 18% – 26.5%
• Expands the holding period for investment funds to 5 years in order to get preferential tax treatment on carried interest
• Reduces the §1202 exclusion on gains from qualified small business stock to 50% for taxpayers with AGI of $400,000 or more
• Allows S-corporations that elected S prior to May 13, 1996 to convert to partnerships tax-free during the 2 years beginning on December 31, 2021
• Potential changes to international tax rates including GILTI, BEAT and FDII

Estates and Trusts

• Reduces federal estate and gift tax exclusion to $5 million indexed for inflation per individual
• Raises the top estate and trust income tax rate to 39.6%
• Expands the 3.8% net investment income tax to include most trade or business income
• Limits the qualified business income deduction for certain higher income trusts
• Disallows discounts for nonbusiness assets held within entities
• Technical changes would reduce efficacy of planning techniques like grantor trusts

Of special note is that these proposals do not include changes to the existing $10,000 state and local income tax deduction for individuals or the elimination of the step-up in basis at death. Both are likely to be the subject of further debate and discussion.

Sax’s Tax Department will continue to keep you up to date as these significant tax change proposals make their way to law.  Should you have any questions or concerns on how these changes may impact you, feel free to reach out to us at www.saxllp.com.