Continued Commentary on House Ways & Means Committee Revenue Proposals

Congress and the new administration continue to pursue new avenues to collect additional tax revenue through various changes to the Internal Revenue Code to pay for the proposed infrastructure bills.  The analysis below focuses on the proposals from the House Ways & Means Committee that were released on September 13, 2021.  It is important to note that these remain proposals, and the final bill, if signed into law, could be different.  The Mather Group, LLC (TMG) continues to monitor these proposals and will keep clients abreast of those most likely to impact them.

While each taxpayer will feel the impact of the proposals in a different way, the trend continues to be an increase in tax on both those with high incomes, and those individuals and families with high net wealth.  Some of the significant proposals include:

INCOME TAX PROPOSALS EFFECTIVE FOR TAX YEARS AFTER DECEMBER 31,2021

• An increase to the top marginal ordinary income tax rate from 37% to 39.6% with the new top bracket now beginning at lower income levels of $400,000 for single filers and $450,000 for joint filers. This new rate would also apply to trusts with income exceeding $12,500.
• Increasing the top capital gains rate from 20% to 25% and linking the top capital gains bracket to the top ordinary income bracket, i.e., the 25% capital gains bracket will begin at $400,000 for single filers and $450,000 for joint filers.
  • Retroactive to sales occurring on or after September 13, 2021
• A new 3% surtax on all incomes over $5,000,000 for both single and joint filers. This is also applicable for trusts with income over $100,000.
• Expansion of the 3.8% Net Investment Income Tax to apply to non-passive pass-through income from S-Corporations for taxpayers with incomes exceeding $400,000 (Single) and $500,000 (MFJ).
• Prohibition on Roth IRA and Traditional IRA contributions if income exceeds $400,000 (Single) and $450,000 (MFJ) AND total value of IRAs and Defined Contribution Plans (401(k), 403(b), etc.) exceeds $10,000,000.
  • Limitation notably applies only to IRA contributions, not contributions to 401(k) plans
• Elimination of the “Backdoor Roth IRA Contribution” and “Mega-backdoor Roth 401(k) Contribution” strategies for all taxpayers regardless of income level. Though taxpayers could potentially still do a Roth IRA/In-Plan Roth 401(k) conversion depending on income level, no after-tax funds could be converted to the Roth account.
• New annual required minimum distributions from qualified accounts for individuals with both high incomes ($400,000 Single & $450,000 MFJ) AND total qualified account balances exceeding $10,000,000, without regard to age.
  • Required distribution would be 50% of the aggregate excess over $10,000,000
  • Additional required distributions would be applicable for taxpayers with aggregate qualified account balances exceeding $20,000,000
• Limitation on the carryforward of excess foreign tax credits from a 10-year carryforward to 5-year carryforward, and elimination of the 1-year carryback.

INCOME TAX PROPOSALS WITH EFFECTIVE DATES BEYOND 2022

• Prohibition on Roth conversions within IRAs and employer-sponsored plans for those with incomes over $400,000 (Single) and $450,000 (MFJ).
  • Effective for tax years after December 31, 2031

ESTATE, GIFT, & GST TAX PROPOSALS 

• Reduction in the estate, gift, and GST tax lifetime exemption by 50% to $5,850,000 per person or $11,700,000 per couple indexed for inflation. This would be effective after 12/31/2021.
• Inclusion of future Grantor Trusts (GRAT, SLAT, ILIT, etc.) in decedent’s taxable estate where the decedent is the deemed owner of the trust assets. The proposal would also tax sales between the grantor and the trust as a sale to a third party.  This would be effective at the enactment of the law. 
  • Grantor Trusts in existence and contributions made prior to enactment would be grandfathered in
  • Grantor Trusts created after enactment and subsequent contributions to those would be included in the decedent’s estate
  • Distributions from trusts subject to the new regime to anyone other than their grantors and the grantor’s spouse would be treated as taxable gifts
• Elimination of valuation discounts for transfers of nonbusiness assets. This would be effective at enactment.

NOTABLE OMISSIONS IN CURRENT PROPOSAL 

• Elimination of the step up in basis to fair market value for decedent’s assets
• Parity between top ordinary income tax rate and top capital gains tax rate (prior proposals sought to tax capital gains at ordinary income tax rates)
• Complete phaseout of the Section 199A deduction
• Increase in earnings subject to Social Security payroll taxes
• Elimination of state and local tax deduction caps for federal income tax

It is important to keep all change in perspective.  While several of the proposals represent a significant departure from existing law, others more closely resemble a reversion to the tax laws in effect prior to the Tax Cuts and Jobs Act of 2017.  The many changes highlighted make it worth noting again that these are still proposals, and will almost certainly change again before final enactment, if passed at all.  Many of the original proposals from the campaign and the Green Book proposals this summer have lacked support and have been either dropped or modified, while new proposals continue to surface each day.  This constant change will continue to happen as part of the budget reconciliation process as there are numerous other bills with different provisions yet to be unified.  There is much yet to be decided regarding the interaction of these proposals in their current form with the Tax Cuts and Jobs Act and its sunsetting provisions. 

Your team at TMG will continue to monitor the proposals and notify clients most impacted by them as we get closer to enactment.  Some proposals will create opportunities for year-end planning, while others will give a window of several years over which to execute various strategies.  TMG will continue to work with our clients on an individual basis to identify the opportunities and strategies in their best interest as we navigate the changing tax landscape. 

TAX RATE COMPARISONS FOR REFERENCE  

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All information contained herein is sourced from the Ways & Means Committee of the U.S. House of Representatives.  More information can be found here: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf.