House Democrats have circulated initial proposals around tax policy changes that they want to include within the Build Back America Act, the massive tax-and-spending budget reconciliation bill that party leaders hope to move through the chamber in the coming weeks. Many of the proposals within the bill are what was expected in one form or another, but there are a few new wrinkles.
According to Bloomberg, a draft of the planned proposals has been circulated, which would raise as much as $2.9 trillion in new taxes, the targets of which are no real surprise: corporations, investors, and wealthy Americans. However, several of the original proposals by the Biden Administration that were widely discussed earlier this year look to have been scaled back, most notably a smaller than expected increase to capital gains rates.
Below is a summary of some of the proposals being discussed. Note that these are just several of the topics being discussed and all are based on our preliminary understanding at this time of what is being reported by Bloomberg and others. This is a very fluid situation and these proposals may change dramatically over coming days as working sessions are held.
- Capital Gains Rates: Increase the top marginal rate from 20% to 25%. This proposed increase is far lower than the original Biden Administration proposal, which called for a maximum capital gains rate of 39.6% for taxpayers with over $1MM of Adjusted Gross Income (AGI)1.
- Income Tax Rates: Increase top rate from 37% to 39.6% for married individuals filing jointly with income over $450,000. This aligns with the original Biden Administration Proposal, although with the impact coming in at slightly lower thresholds.
- 3 Percent Surtax: Imposes a 3% surtax on individuals with modified AGI in excess of $5,000,0002.
- Corporate Tax Rates: Increase top rate from 21% to 26.5%. This contrasts with the originally proposed rate of 28%.
- Carried Interest: Increase the holding period requirement for long term capital gains treatment from three to five years alongside other possible requirements to limit loopholes to this rule.
- Estate Tax Lifetime Exemption: The Tax Cuts and Jobs Act increased the exemption to current levels ($11.7MM) but was set to expire on Dec 31, 2025. The proposal may move up the expiration to Dec 31, 2021, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation. Changes to the lifetime exemption were noticeably absent from previous proposals, which makes this a significant change from initial discussions if proposed.
- Estate Tax Valuation Rules Change: This provision changes the valuation rules to ignore discounts from partial ownership or lack of control of passive assets in determining its value. This rule would only apply to assets that are not used in a business.
- Net Investment Income Tax: Expands the income that falls under the Net Investment Income Tax to potentially include other forms of income than just investments.
- Mega IRAs: A topic of much recent discussion, the proposals include additional requirements that would limit the ability of individuals with taxable income over $400,000 (or $450,000 for married taxpayers filing jointly) to contribute to retirement accounts valued over $10MM and potentially make required distributions.
- SALT Deduction: While one of the most frequent discussions with clients, SALT deductions however do not seem to be addressed in this early set of proposals.
- Grantor Trusts: There is discussion that we can expect to see some form of changes related to both grantor trusts (e.g. Intentionally Defective Grantor Trusts and Grantor-Retained Annuity Trusts), but are unclear as to specifics.
Again, as mentioned earlier, this is a fluid situation and the proposals could change drastically over the next few days and weeks as they make their way through committee, on to the House floor for voting and then over to the Senate. Our team will continue to monitor and update you on notable changes.
1Adjusted Gross Income (AGI) is generally defined as gross income minus adjustments to income. Gross income includes wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to income include such items as alimony payments or contributions to a retirement account.
2For this purpose, modified AGI refers to adjusted gross income reduced by any deduction allowed for investment interest.
Section-by-section summary of these provisions is available from the Ways and Means Committee staff.
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