The House Democrats have released an outline detailing some proposed tax increases. These tax hikes are set to fund spending on social infrastructure build-out and climate policy. While it is likely that the proposal will be modified and adjusted in the upcoming weeks, we have put together a guide to help you prepare for some potential changes.
Top Individual and Corporate Tax Bracket Increases
For individuals, the top marginal tax rate is proposed to increase from 37% to 39.6%. The new rate would impact individuals with taxable income of $400,000 or more and married couples with taxable income of $450,000 or more. This change is proposed to go into effect in 2022.
If your adjusted gross income (AGI) exceeds $5 million as an individual or married couple, you may also be subject to an additional 3% surtax.
The corporate tax rate is proposed to increase from 21% up to 26.5%.
Capital Gain and Dividend Tax Increase
In addition to the proposed changes to income tax brackets, it has also been suggested that the top tax rate on dividends and long-term capital gains would rise from 20% to 25%. This would impact individuals earning more than $400,000 and married couples earning more than $450,000. This is a change that could potentially impact all sales made after September 13th, 2021.
Estate Tax Changes
There are several proposed changes that could impact certain estate planning techniques. In 2017, congress doubled the amount that could be exempted from estate tax. At that time, the exemption amount was doubled from $5.49 million to $11.8 million. This rule is proposed to be reversed after 2021.
In addition to the changes to exemption limits on the estate tax, it is also proposed to limit certain uses of grantor trusts (specifically intentionally defective grantor trusts) and asset transfers with discounted values.
IRA Changes
If the bill passes in its current state, if you are a high-income earner (in the top tax bracket) with retirement accounts totaling over $10 million, you would be prohibited from contributing additional funds to your Traditional or Roth IRA. It is important to note that this change would impact Traditional and Roth IRAs contributions, however as it stands currently, you would still be able to contribute to 401(k)s, SEP IRAs, and pension plans.
There are also proposed changes that would force these individuals to take much higher mandatory distributions once account balances reach that threshold.
There is some signaling that Roth IRA conversions and Mega Backdoor Roth conversions would no longer be allowed if the proposed changes go into effect.
Pass-Through Businesses
Currently, many business owners pay taxes on their individual returns rather than paying corporate tax. At this time, this category of business owners can deduct up to 20% of their net business income which in turn reduces effective income tax by 20%.
With the proposed changes the deduction would be capped to $500,000 for joint filers and $400,000 for single filers. In addition to the cap, there would also be a phase-out for folks who earn more than $400,000.
As it stands presently, S-Corp profits are not subject to employment tax or net investment tax. However, if the bill passes in its present form, this will no longer be the case.
Keep in mind that these proposed changes are likely to be adjusted prior to the bill passing, however we hope that this guide gives you a general understanding of the areas that are most likely to be impacted by the bill. We will keep you informed if the proposed legislation becomes law.
