Now That Tax Changes Are Closer to Reality, What do You Need to Know?

November 23, 2021

Congress is buzzing with talk of revising the tax law to target more wealthy individuals, and federal lawmakers continue to take steps towards achieving those changes. On September 13, 2021, the House Ways and Means Committee released parts of a bill that, if enacted, would reshape the U.S. tax landscape and collect more from wealthier taxpayers. On October 28, 2021, many of those provisions were modified substantially. Six days later, even more modest revisions were created. While the third iteration of the House’s tax bill is substantially subdued from its original form, it still promises to bring about changes affecting all individual earners and businesses, alike. If enacted in its current form, this bill would:

As to Individual Income Taxes – Generally

  • Impose a 5% surtax on individual or married taxpayers to the extent their adjusted gross income (“AGI”) exceeds $10 million and an additional 3% to extent the AGI exceeds $25 million.
  • Impose 5% surtax on non-grantor trusts to extent their AGI exceeds $200,000 and additional 3% if AGI exceeds $500,000.
  • Subject digital assets including crypto currencies and foreign currency to expanded constructive and wash-sale rules that suspend losses when a taxpayer buys a substantially identical security within 30 days of the loss.
  • Prohibit additions to traditional IRAs with account balances exceeding $10 million, and increased required minimum distributions from large IRAs.
  • Increase cap on deduction for state and local taxes paid from $10,000 to $80,000 until 2030.

As to Individual Income Taxes – Specific to Business Owners

  • Subject profits from business to the net investment income tax, which currently only applies to interest, dividends, capital gains, rental and royalty income, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer.
  • Permanently disallow an annual deduction for business losses in excess of $500,000 (with limited exceptions)
  • Limit the qualified small business stock exclusion to 50% for individual or married taxpayers with income greater than $400,000.

As to Corporate Taxes

  • Impose 1% tax on stock buybacks and publicly traded companies.
  • Impose 15% minimum tax on profits of publicly traded companies that report more than $1 billion in profits.

What is NOT included? – the latest bill does not currently contain provisions:

  • Increasing the top ordinary income tax rate (now 37%) or the top long-term capital gains tax rate (now 20%).
  • Eliminating the step-up in basis at death rule.
  • Deeming death a realization event, triggering capital gain on any unrealized growth, or imposing some type of annual tax on the appreciation of taxpayer wealth.
  • Increasing holding period for capital gains treatment for carried interest to 5 years; this had been originally proposed in the September 13 bill.
  • Reducing the gift and estate tax exclusion amount from $11.7 million to $6.03 million; instead, those exclusions would sunset, as scheduled under current law, on January 1, 2026.
  • Increasing corporate income tax rate from 21% to 26.5%

Our firm will continue to update you as this, or any, tax bill moves through Congress, and we urge you to reach out to the attorneys at Rock Fusco & Connelly, LLC to determine the best steps in your estate planning, wealth protection, small business, and other tax-related needs.