Tax Provisions in President Biden’s Spending Plan

On September 13th, House Ways and Means Committee unveiled their proposals to fund President Biden’s spending priorities.  Below are some of the key tax provisions included in the plan.  This list is not comprehensive and is subject to change as the bill progresses.

Tax Provisions for Corporations in the Spending Plan:

Current law taxes corporations at a flat tax of 21%.  The proposal brings back graduated rates with a top rate of 26.5% on income of more than $10 million.

Proposed changes would only allow 50% exclusion of gain realized on dispositions of Qualified Small Business stock for taxpayers with adjusted gross income equal to or exceeding $400,000.  Current law allows up to 100% exclusion.

How the Spending Plan will Affect Individuals:

Anderson ZurMuehlen Tax Team describes Tax Provisions in President Biden's Spending Plan.

The proposal increases the top individual income tax rate to 39.6% for individuals with taxable income over $400,000 and married couples with taxable income over $450,000.  This change applies to tax years beginning after December 31, 2021.

The top rate on capital gains increases to 25% from the current top rate of 20%.  To prevent an impact on the markets, a transition rule applies the top 20% rate to transactions occurring before the date of introduction. 

Under the proposal, the 3.8% Net Investment Income Tax would be assessed on ordinary trade or business income for individuals with taxable income over $400,000 (or $500,000 for married filing joint).  Wages are not considered ordinary trade or business income.

The proposal would eliminate the conversion of any after-tax contributions to a retirement account into a Roth IRA.  Current law allows taxpayers, who otherwise would not be allowed to contribute to a Roth IRA, to contribute to a nondeductible IRA and then convert that amount to a Roth IRA.  This is known as the back door Roth contribution.  Under the proposed bill, this would no longer be allowed.

Taxpayers with taxable income over $400,000 ($450,000 MFJ) with large retirement account balances (generally $10 million or more) would no longer be allowed to make retirement contributions and would generally be required to take minimum distributions of 50% of the amount that exceeds $10 million at the end of the prior year.

Tax reform passed in 2017 allows individuals a deduction equal to 20% of qualified business income.  The proposed tax bill would limit the deduction to $500,000 for joint filers and $400,000 for individuals.

Estate and Gift Tax Provisions:

The proposed law would lower the exclusion from estate and gift tax to $5,000,000 per individual, indexed for inflation using 2010 as the base year.  The estimated exclusion amount for 2022 is $6,000,000. 

Transfer of ownership in businesses that hold nonbusiness assets will not qualify for a valuation discount for estate and gift taxes.

This list is not comprehensive and is subject to change as the bill progresses. If you have questions about how the tax provisions will affect you, contact the AZ Tax Team.

This article was written by Mike Combo, CPA and Shareholder in our Missoula office.

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