The latest update on the Biden administration’s proposed tax changes comes from the House Ways and Means Committee, and contains many changes to tax provisions and adds new ones. The plan is slightly less ambitious than Biden initially announced, but there are still plenty of changes. The bill is still being debated in congress and any of the provisions could change materially as the bill goes through the legislative process. Some of the effective dates are listed below, but they may differ depending on the provision it applies to. Below is a brief synopsis of some of the more important provisions business owners should be aware of:
Business tax provisions
- Corporate tax rate increases to 26.5 percent from the current rate of 21 percent based on a graduated rate schedule starting at 18 percent on the first $400,000 of income and 21 percent on income up to $5 million. This provision would take effect for tax years after December 31, 2021.
- Limits to Section 199A deductions. The maximum deduction would be $500,000 in the case of a joint return and $400,000 for an individual return for tax years after December 31, 2021.
- Elimination of excess business losses for non-corporate taxpayers. This provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year.
- Changes to Section 1202 gains would be extended, but with limitations for taxpayers with adjusted gross income in excess of $400,000, this would apply to exchanges after September 13, 2021.
- There are several provisions related to international business activity and foreign income which are highly technical in nature which should be reviewed with an international tax advisor.
Individual income tax provisions
- The top marginal income tax rate increases to 39.6 percent from the current top income tax rate of 37 percent and would apply to married couples filing with taxable income over $450,000, compared to the maximum rate currently at taxable income over $622,051.
- The top long-term capital gains rate will rise from 20 percent to 25 percent, for taxpayers in the highest tax bracket.
- The plan creates a new 3 percent surcharge tax on individuals with modified adjusted gross income of $5 million annually. This surcharge applies for $2.5 million in income for married filing single taxpayers and $100,000 on estates and trusts.
Retirement plan provisions
- New limitations for high income taxpayers with large retirement balances that could prevent any additional contributions to traditional and Roth IRAs if the aggregate balance of the taxpayer’s accounts (IRAs, traditional and Roth, 401(k), 403(b), qualified annuities and Section 457 plans) exceeds $10 million. Mandatory required minimum distributions would apply for high income taxpayers with balances in all plans of over $10 million regardless of the taxpayer’s age.
- Elimination of “back-door” IRA conversions for high income taxpayers, which also applies to distributions, transfers and contributions made in taxable years beginning after December 31, 2021.
- Disallowance of after-tax dollars to qualified plans for any taxpayer, including any after-tax dollars to be converted to a Roth IRA.
Estate and gift tax provisions
- This provision terminates the temporary increase in the unified credit against estate and gift taxes, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation.
- Provides technical changes regarding valuation rules for estates and gifts and new rules for grantor trusts.
Other provisions within the bill
- The bill allocates $78 billion to fortify IRS enforcement activities on taxpayers with taxable income of $400,000 or more.
There are many other proposed provisions which are industry to tax specific not mentioned here. Please contact your UHY representative to obtain more information on those provisions.