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What You Need to Know About the Current Federal Tax Proposals

Sept. 23, 2021, 8:45 AM

For months, we’ve been hearing about potential changes to the current tax laws. Various proposals have been floated, and not all of those are moving forward. With that in mind, here’s what you need to know about what’s happening in Congress.

I thought the budget was resolved back in August?

Not exactly. In August, the House of Representatives approved a budget resolution—sometimes referred to as framework: The vote was 220-212 along party lines. That same month, the Senate passed a similar budget resolution, 50-49, also along party lines.

So it sounds like it’s a done deal?

Far from it. The resolutions basically directed various committees to fill in the details of a tax and social spending package of up to $3.5 trillion.

Last week, many of the details of what House Democrats want to do on tax policy were detailed in legislation marked up by the House Ways and Means Committee. The measure was approved 24-19—another party-line vote—and sent to the House floor. Typically—but not always— the committee won’t advance an important bill like this one if they’re not sure if they have the votes. However, the bill still has another stop before heading to the House floor: the House Rules Committee, where lawmakers are planning to make some changes. Plus, there will be a chance to amend the committee-approved package once it hits the floor.

The plan is to advance the tax-and-spend package through budget reconciliation, which would avoid the possibility of a Republican filibuster in the Senate.

That sounds familiar. Have I heard about reconciliation before?

You probably have. It used to be used sparingly, but we’re seeing it more often. It was used in 2017 for tax reform, and in 2021 for a pandemic relief package.

Reconciliation was created as part of the Congressional Budget Act of 1974. The idea was to allow some legislation—usually involving the budget— to go through the process faster, with fewer procedural hoops and no filibuster.

There are some specific rules that can apply, like the Byrd Rule in the Senate. Under the Byrd rule, named after former Senator Robert Byrd (D-W.Va.), any legislation that would significantly increase the federal deficit beyond the ten-year budget window or is otherwise “extraneous” can be blocked.

“Extraneous” provisions include those that change Social Security or are outside the jurisdiction of the committee. The Senate can opt to waive the Byrd rule, but that requires 60 votes.

So, what it’s in the House bill?

Keep in mind that a lot can happen while legislation moves through Congress, especially with Democrats hold razor-thin majorities in both chambers.

Here is an overview of what House Democrats included in their tax overhaul legislation.

Individuals

  • The top individual income tax rate would revert to 39.6% for single filers making above $400,000, head of household filers above $425,000, and joint filers reporting more than $450,000. Without any Congressional action, that would still happen in 2025 (because of an earlier reconciliation).
  • The top capital gains tax rate for those same high-income taxpayers would increase from 20% to 25% for all sales and transactions closing after September 13, 2021.
  • The temporary expansion of the child tax credit—and advanced payments—would be extended through 2025. Additionally, changes to the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit (CDCTC) would become permanent.
  • There would be a 3% surtax on modified adjusted gross income over $5 million for single individuals, heads of household, married couples filing jointly, and surviving spouses. The surtax would kick in at $2.5 million for married couples filing separately.
  • A $10 million limit would apply to Individual Retirement Accounts (IRAs) contributions—allowing for no further contributions for married couples with taxable income over $450,000 or singles with taxable income over $400,000. The $10 million threshold would also accelerate required minimum distributions for those accounts.
  • The proposal would also disallow the so-called “back-door” Roth IRAs by eliminating conversions for IRAs and 401(k) plans for single filers making over $400,000, head of household filers above $425,000, and for joint filers reporting more than $450,000.
  • The proposal would also modify the wash sale rules to include commodities, currencies, and digital assets.

Trusts and Estates

  • There would be a 3% surtax on income that exceeds $100,000 for trusts and estates.
  • The proposal would eliminate those ever-popular valuation discounts for transfers of non-business assets.
  • The federal estate tax exclusion amount would be reduced to $6,020,000 in 2022 from $11,700,000 in 2021.
  • Two key estate planning techniques would be altered: Grantor trusts would be included in the grantor’s estate, and distributions from grantor trusts would be treated as taxable gifts. And, sales to intentionally defective grantor trusts (IDGTs) would be eliminated.

Businesses

  • The top corporate tax rate would increase to 26.5% from 21% for corporate income above $5 million. (The 2017 law cut the rate for large corporations from 35% to 21%.) The tax rate drops to 18% for small businesses with income less than $400,000 and would remain 21% for all other businesses.
  • The Section 199A pass-through deduction would be capped at $400,000 for single filers, $500,000 for joint filers, $250,000 for married couples filing separately, and $10,000 for a trust or estate.
  • The 3.8% Net Investment Income Tax, or NIIT, would apply to net investment income derived in the ordinary course of a trade or business for single taxpayers making more than $400,000 in taxable income and $500,000 for married couples filing jointly. It’s worth noting that the NIIT does not apply to wages already covered by FICA.
  • The deduction for Global Intangible Low-Taxed Income, or GILTI, would be reduced, essentially resulting in a tax rate of 16.5625%—it would also require a country-by-country method for calculating GILTI. Additionally, the proposal would reduce the deduction for foreign-derived intangible income, or FDII, to 20.7%.
  • The proposal would allow eligible S corporations—those organized on May 13, 1996, before the current-law check-the-box regulations—to reorganize as partnerships without triggering a tax.
  • The proposal would also permanently disallow excess business losses—net business deductions in excess of business income—for noncorporate taxpayers.

What Didn’t Make It In?

There were some surprises in the tax package unveiled by the House. Some key pieces of the Biden administration’s tax plans were noticeably absent, while lawmakers continue to work in the background on other contentious issues:

  • The $10,000 SALT cap is one of the biggest open questions. It isn’t currently in the House tax package, but Ways and Means Chairman Richard Neal (D-Mass.) promised that some sort of relief will be in the final package.
  • Real estate investors were worried, but it does not appear that there will be any repeal of like-kind exchanges.
  • Environmental activists will likely be angry, but a variety of tax breaks for oil and gas companies would remain in place.
  • The very (very) controversial provision to eliminate stepped-up basis at death? It didn’t show up in committee.

What about the IRS?

#FundtheIRS proponents may get their way in the House bill: It includes $80 billion over 10 years for the IRS.

So what comes next?

This is a huge bill, so expect more debate. Assuming that the House and Senate both manage to get the bills to vote, they must pass identical versions of a final bill before sending a single document to the President for signature. Stay tuned!

This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; Yuri Nagano at ynagano@bloombergtax.com

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