The House recently released a nearly 900-page proposed bill that would make major changes to current tax laws. The bill is intended in large part to help pay for both the Biden Administration’s budget and the infrastructure stimulus bill.
It is important to keep in mind that the provisions and changes outlined below are by no means settled. Changes can (and likely will) still be made as the Senate ratifies the bill; however, the remainder of this article should give readers a good idea of the most significant provisions.
Income Tax Rates are Rising
The increase in the top income tax rate is probably the most talked about proposed change in the bill, bringing it up from 37 percent to 39.6 percent. The top marginal rate would apply to single filers with taxable income over $400,000, heads of household over $425,000 and married filing jointly taxpayers making over $450,000. The impact starts with income earned on Jan. 1, 2022, and after.
The highest capital gains rate would increase from 20 percent to 25 percent and apply to qualified dividends. The increase is effective on gains made from sales that happen on or after Sept. 13, 2021, but any gains from sales incurred before or that result from binding contracts executed before this date fall under the old rate. For example, gains received post-Sept. 13, 2021, under an installment sale entered on Aug. 31, 2021, would be subject to the old 20 percent rate.
Expansion of the Net Investment Income Tax
The bill would redefine net investment income (NIIT) to include any income earned in the ordinary course of business. Currently, the 3.8 percent NIIT surcharge applies only to passive income. The NIIT is applied to single taxpayers with more than $400,000 in taxable income and joint filers with over $500,000. This change would go into effect on Jan. 1, 2022.
New 3 Percent Surcharge on High Income Individuals
Starting after Dec. 31, 2021, a new 3 percent tax will be placed on Adjusted Gross Incomes (AGI) over $5 million ($2.5 million if married filing separately).
Small Business Tax Increases
Under the bill, the current 21 percent flat corporate (C-Corporation) tax rate would change to a three-tiered system. The structure would tax net income up to $400,000 at 18 percent; income from $401,000 to $5 million at 21 percent; and net income over $5 million at 26 percent.
Other Miscellaneous Changes
As you can imagine, with an 881-page bill, there are only so many changes that can be covered in this article, but here is a smattering of miscellaneous provisions:
- Crypto currencies would become subject to the constructive and wash sale rules (like most marketable securities such as stocks) starting Jan. 1, 2022. This means that if you are holding a position at a loss, you have until the end of 2021 to harvest the loss and immediately buy back in.
- IRAs will no longer be allowed to invest in an entity where the IRA owner has a 10 percent or greater ownership interest (down from the current 50 percent threshold) or if the IRA owner is an officer of the entity.
- $80 million is earmarked for the IRS to step up enforcement and audit more taxpayers.
- Smokers will feel the pain as the bill also doubles the excise taxes on cigarettes, small cigars, and roll-your-own tobacco.
Remember that this is only the House version of the bill, and nothing is final. Also remember that Democrats control the House, and the Senate is split 50/50 with the Democratic VP as the tiebreaker. As a result, while there will be changes, the major provisions outlined above will likely be in the final law in some form or another.