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House Ways and Means Committee Releases Draft of Tax Proposals

Posted by : on : September 21, 2021 | 4:31 pm

On Monday, September 13, 2021, House of Representatives ("House") Ways and Means Committee (the "Committee") Chairman Richard Neal (D-MA) released draft legislation that sets forth several tax proposals. The 881 pages of proposed legislative changes provide the latest insight into the ongoing Congressional tax discussions. Additionally, the Committee released a section-by-section summary of the proposed revenue raisers, as well as a section-by-section summary of proposed tax incentives included in the legislation. The Committee will begin mark-up of these provisions this week.

 

The release of the legislation comes as House Democrats move toward the September 27th date set for a vote on the infrastructure bill previously passed by the Senate. A group of House Democrats had sought passage of the infrastructure bill immediately rather than delay as Democrats continued discussion and work on the budget reconciliation package which will include the proposed tax legislation. As a compromise, the September 27th date was set for the House vote on the infrastructure bill with a goal of passing the budget reconciliation package by the end of the month.

 

Notably, the release of the proposal follows a weekend during which varying viewpoints were set forth by Democratic members of Congress. Of significant note were the comments made by Senator Joe Manchin (D-W. Va.) on Sunday in which he again asserted a desire for a spending package significantly smaller than the $3.5 trillion package suggested by other Democrats in Congress. This follows his September 2nd op-ed in the Wall Street Journal in which he advised Congress to take a "pause" before advancing further spending packages.

 

Although the proposed legislation is subject to change and will likely experience further modifications during the mark-up phase and new proposals may arise, this FGMK Tax Alert highlights a few of the significant elements of the proposed tax legislation.

 

Tax Rate Modifications (Generally to be effective after December 31, 2021)

 

  • Would replace the current flat tax rate of 21 percent for C corporations with a graduated income tax rate structure (Note: President Biden's plan had called for a flat 28 percent tax rate).
    • Proposed graduated rate structure
      • 18 percent for first $400,000;
      • 21 percent on income up to $5 million; and
      • 26.5 percent on income over $5 million.
  • For corporations with taxable income over $10 million, the tax is increased by the lesser of 3 percent of such excess or $287,000.
  • Personal service corporations are not eligible for the graduated rate structure.

 

  • Would increase the top marginal tax rate for individual taxpayers to 39.6 percent with the top marginal tax bracket taking effect after December 31, 2021 at the following taxable income levels:
    • Single – Taxable income over $400,000
    • Head of Household – Taxable income over $425,000
    • Married Filing Jointly – Taxable income over $450,000

 

  • Would increase the top capital gains tax rate for long-term capital gains to 25 percent for sales taking effect on or after September 13, 2021 (Note: Previous discussion suggested application of increased rate to sales on or after April 28, 2021)
    • Gains resulting from transactions under a binding contract as of September 13, 2021 would not be subject to the 25 percent rate.

 

Retirement Savings Provisions (Generally to be effective after December 31, 2021)

 

  • Would prohibit further contributions to a Roth IRA or traditional IRA for a taxable year if the total value of an individual's IRA and defined contribution accounts exceeds $10 million as of end of prior taxable year. The limit would apply if a taxpayer's taxable income exceeded defined threshold based on return filing status.
    • Single – Taxable income over $400,000
    • Head of Household – Taxable income over $425,000
    • Married Filing Jointly – Taxable income over $450,000

 

  • Would provide for a required minimum distribution ("RMD") if an individual's combined Roth IRA, traditional IRA, and defined contribution retirement account balances exceed $10 million at the end of a taxable year.
    • The RMD would only be required if the taxpayer's taxable income is above the thresholds noted above (same contribution limits to IRAs).
    • The RMD would be required in the subsequent tax year.
    • Currently, a RMD is only based on age (taxpayer obtains age of 72).

 

  • Additionally, to the extent the combined balance amount in a traditional IRA, Roth IRA and defined contribution plan exceeds $20 million, the excess would be required to be distributed from Roth accounts up to the lesser of $20 million or the aggregate balance in Roth accounts.

 

  • Would eliminate backdoor Roth IRA contributions from after-tax accounts for taxable years beginning after December 31, 2021 regardless of taxable income, and would eliminate similar strategies for pre-tax income in taxable years beginning after December 31, 2031 if income exceeds the thresholds identified above.

 

Trust and Estate Tax Modifications (Generally to be effective after December 31, 2021)

 

  • Would reset the unified credit against estate and gift tax to $5 million per individual, adjusted for inflation.

 

  • Would provide for the inclusion of grantor trusts in a decedent's taxable estate when the decedent is deemed the owner of the trust.

 

  • Would restrict use of valuation discounts.

 

International Tax Provisions (Generally to be effective after December 31, 2021)

 

  • Would reduce the Section 250 deduction for foreign derived intangible income ("FDII") to 21.875 percent and for global intangible low-tax income ("GILTI") to 37.5 percent.

 

  • Would modify GILTI to provide for a country-by-country regime and reduce the qualified business asset investment factor from 10 percent to 5 percent, thereby decreasing the amount of income currently shielded from GILTI.

 

  • Would require foreign tax credit determination on a country-by-country basis.

 

  • Would reduce the scope of Section 245A dividends received deduction to controlled foreign corporations ("CFCs") only (currently available for CFCs and specified foreign corporations ("SFCs").

 

  • Would amend the tax rates and timing periods for the Base-Erosion and Anti-Abuse Tax ("BEAT").

 

Credits & Incentives (Generally to be effective after December 31, 2021)

 

The proposed legislation includes several tax credit incentives. The incentives are heavily focused on green energy, and the following provides an overview of a few of the incentives set forth in the proposal.

 

  • Would extend and modify the Earned Income Tax Credit and the Child Tax Credit, including the advance of the Child Tax Credit through 2022.

 

  • Would modify and expand several production and investment tax credits under Section 45 and Section 48, respectively.

 

  • Would modify and expand the Low-Income Housing Tax Credit under Section 42 and the Rehabilitation Credit under Section 47.

 

  • Would modify and expand residential energy credits under Section 25C and Section 25D.

 

  • Would create refundable credits for new and previously owned qualified plug-in electric drive motor vehicles.

 

  • Would modify and increase the value of Section 179D deduction.

 

  • Would make the New Markets Tax Credit permanent.

 

Additional Tax Adjustments (Generally to be effective after December 31, 2021)

 

  • Would establish a new 3 percent surtax on high-income individuals with modified adjusted gross income in excess of $5 million ($2.5 million if married filing separately).

 

  • Would expand the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income more than $400,000 ($500,000 if married filing jointly). (Note: The provision clarifies that it would not be assessed on wages on which FICA is already imposed. This would negate the ability of such high-income S corporation shareholders to avoid additional tax on Box-1 income).

 

  • Would make the excess business loss of noncorporate taxpayers limitation permanent (Note: The CARES Act suspended the limitation under Section 461(I) for the 2019 and 2020 tax years. Currently, it is applicable for tax years beginning after December 31, 2020 and before January 1, 2027).
    • The legislation would also modify the provision so that the carryforward loss would no longer be treated as an NOL in future tax years, but rather would be limited to use against business income in future tax years.
    • The legislation would make modifications to Section 461(I) effective for tax years beginning after December 31, 2020.

 

  • Would extend the holding period for applicable partnership interests, i.e., carried interests, from more than three years to more than five years to receive long-term capital gain treatment.

 

  • Would limit the gain exclusion for qualified small business stock under Section 1202 to 50 percent (rather than 75 percent or 100 percent as applicable) for taxpayers with adjusted gross income equal to or exceeding $400,000, as well as for trusts and estates.

 

  • Would apply the wash sale rules under Section 1091 and the constructive sale rules under Section 1259 to digital assets.

 

  • Would limit the 199A 20 percent business deduction to $500,000 for taxpayers married and filing jointly ($400,000 for individuals and $250,000 for married taxpayers filing separately).

 

  • Would delay the effective date for required amortization of research and experimentation expenditures from tax years beginning after December 31, 2021 to tax years beginning after December 31, 2025.

 

Items Not Included in Proposal Legislation

 

  • Does not contain any modifications of the state and local tax deduction cap which is currently set at $10,000. (Note: Several Democrats have asserted that such modifications are required for their support of any tax legislation).

 

  • Does not include any further modifications of Section 1031 like-kind exchanges.

 

Again, these are just a few highlights of the first round of Congressional tax proposals to be included in the budget reconciliation package. FGMK will continue to monitor the tax legislation landscape and provide updates as they occur.

 

 


The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.

 

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