The House Ways and Means Committee has released the Democrat’s proposed tax increases to fund their $3.5 Trillion social infrastructure economic stimulus package.
These tax hikes and changes, estimated to raise $2 trillion, are just proposals at this stage. In order to get the vast majority of Democrats on board (and all votes are needed in the Senate) it is expected that these tax proposals will go through many iterations and concessions will be made to get it passed.
But the “official” release of these tax law changes does set the theme and trend of how your tax payments may change in the coming years. So it’s important to pay attention to the details. I will post updates as they are released but here are the key tax law changes released so far:
Federal Income Tax Rate
The proposal includes provisions to raise the top marginal income tax rate to 39.6% (from 37%) for individuals making over $400,000 and married couples making over $450,000. That’s down from $523,600 and $628,300 under current law.
The proposal also calls for a 3% surtax on ultra-wealthy individuals and married couples with adjusted gross incomes above $5 million. In addition proposals include the removal of many incentives for estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.
Capital Gains Tax
As expected the proposals call for an increase of the long-term capital-gains and dividends rate to 25% from 20%. This is less than what the Biden administration wanted and also excludes imposing “death” tax to heirs on unrealized asset gains.
What did raise some consternation is that if passed the capital-gains tax increase would be effective immediately, and retroactively applied even if the bill is passed at a later date.
IRA Limits and Mandatory Distributions
People with tax-advantaged retirement accounts (e.g. IRAs) worth over $10 million would no longer be able to contribute to those accounts and would face sharply higher mandatory distributions.
Child Tax Credit Permanent Expansion
The new package calls for making the Child Tax Credit permanent.
Property Tax Deduction
The proposal released by the committee didn’t address the State and Local Tax Deduction (SALT) which was capped at $10,000 in 2017. But this may be revisited in future revisions given many progressive Democrats in high taxing states are pushing for the cap to be raised or removed entirely.
Corporate Tax Rates
The top Corporate tax rate will rise to 26.5% from 21%, which is better than the 28% rate that President Biden had wanted. The proposal would also change the current flat tax rate structure to a progressive one, so small business are not adversely impacted. It would work by imposing a 18% on the first $400,000 of income; 21% on income up to $5 million, and a rate of 26.5% on income thereafter.
Partnerships and S-Corp business owners may see the biggest changes, with caps being reintroduced that would limit the owners personal income tax deductions to $500,000 for joint filers, $400,000 for individuals and $250,000 for a married person filing a separate return.
Companies would also face higher taxes on their foreign income with the minimum tax would go up from 10.5% to 16.6%.
See the full House Ways and Means proposal here.