U.S. taxpayers have been awaiting the tax implications of last fall’s elections. The Biden Administration has floated trial balloons and legislators have maneuvered and argued with one another, including factions within Biden’s own majority party. While nothing is yet certain, it appears lawmakers are getting closer to a compromise, if not an agreement, on how to pay for the $3.5 trillion infrastructure bill.
The House Ways and Means Committee released details of their proposed tax increases on September 13. While the overall tax hikes are less than President Biden’s original plan, many are still significant. Here is a list of key points from the Democratic proposal.
Corporate tax rates
Corporations currently pay a flat 21% on all taxable income. This proposal would add a top rate of 26.5% on corporate income over $5 million. Income under $400,000 would be taxed at 18%, while income between $400,000 and $5 million would stay at 21%.
Individual tax rates
This proposal sticks to the President’s promise of increasing tax on higher income taxpayers. Those making more than $400,000 a year ($450,000 filing jointly) would pay 39.6% on ordinary (non-capital gain) income, up from the current rates of 35-37%, depending on filing status. Individuals with income over $5 million must also pay a 3% surtax on both ordinary and capital gain income.
Joint filers will now be subject to the 3.8% Medicare surtax on active trade or business income over $500,000 ($400,000 for singles). Currently that surtax is only assessed on passive income such as interest, dividends, and capital gains. It should be noted that this tax would now apply to capital gains from the sale of a pass-through entity, i.e. partnership or S corporation.
Capital gains rates
The top rate paid on long-term capital gains would increase from 20% to 25%, and brackets would change to match those for ordinary income, effective 9/13/2021 if this proposal becomes law.
Estate and gift tax exemption
The proposal would cut in half the current lifetime exclusion for a married couple from $23.4 million to $11.7 million at 12/31/2021. That is four years sooner than prescribed in the 2017 Tax Cut and Jobs Act. Certain estate planning techniques such as the use of grantor trusts and discounted values on transfer would also be limited. However, there is no clear language detailing how those limitations will be accomplished.
There are several other provisions affecting both businesses and individuals, including not repealing the stepped-up basis loophole for inherited property at death, various increases on the taxation of foreign income and a four-year delay of a detrimental Research and Development Credit provision currently scheduled for 2022.