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House Ways & Means Committee releases first draft of tax proposals

Sep 28, 2021

On September 13, the House Ways and Means Committee released its first draft of the proposed tax changes to be incorporated into a budget reconciliation to fund President Biden’s $3.5 trillion spending priorities.  

While the draft provides insight on where negotiations currently stand, it is essential to remember that this is only the first step in creating the final legislation. Given the current political environment, there are likely to be numerous twists and turns along the way, with the final tax law changes looking very different than this draft.

However, these initial tax proposals are broad-ranging, and many taxpayers would be significantly impacted by at least some of the provisions.

The following is a summary of key items from the draft. If you are interested in seeing more detail regarding these items, we’ve also written multiple in-depth articles:

The impact on individuals

  • Increase the top marginal income tax rate from 37% to 39.6%
  • Increase the top capital gains tax rate from 20% to 25%
  • Impose a 3% tax surcharge
  • Expand the income base subject to the 3.8% net investment income tax
  • Limit the qualified business income deduction
  • Make the limitation on the deduction of business losses permanent, and change the treatment of loss carryovers
  • Apply the business interest limitations at the pass-through owner level rather than the entity level, and limit the carryover period
  • Expand the applicability of the carried partnership interest rules to Sec. 1231 gains and extend the required holding period to five years
  • Significantly decrease the tax savings available on the sale of qualified small business stock
  • Eliminate the ordinary loss deduction available for worthless partnership interests

The impact on retirement plan rules

  • Prohibit contributions to IRAs for certain taxpayers having significant combined value in their retirement accounts
  • Require taxpayers of any age to take minimum required distributions if the combined value in their retirement accounts exceeds $10 million
  • Minimize after-tax contributions to qualified plans
  • Prohibit “back door” Roth conversions
  • Reduce investment options available to IRAs

The impact on businesses

  • Replace the flat 21% corporate rate with a graduated structure topping out at 26.5%
  • Adjust the dividend received deduction percentages
  • Enhance the Work Opportunity Tax Credit
  • Delay the required capitalization of research and experimentation expenses
  • Provide a two-year window to convert qualifying S corporations to partnerships on a tax-free basis
  • Deny excessive conservation easement deductions generated by syndicated partnerships

The impact on estates, gifts and trusts

  • Increase top marginal income tax rate to 39.6%
  • Increase the top capital gains rate to 25%
  • Impose a 3% tax surcharge
  • Expand the income base subject to the 3.8% net investment income tax
  • Limit the qualified business income deduction
  • Accelerate the reversion of the estate and gift tax lifetime exemption to roughly $6 million
  • Minimize the income and estate tax value of using grantor trusts, including existing trusts
  • Reduce or eliminate valuation discounts on many gifts of interests in closely held businesses
  • Significantly increase the maximum estate reduction for valuation of business real property

What’s next?

Wipfli will continue to monitor progress with respect to the Build Back Better Act and issue guidance as further details are provided on provisions that could impact businesses and their owners.  

But don’t wait until these proposals have become law to start thinking about how they will impact you, your business and your future deals. If you have questions or would like additional information, please contact us. We are here to help.

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Author(s)

Crystal Christenson, CPA, MST
Partner
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