On September 13, 2021, the House Ways and Means Committee released new proposed tax reforms to fund the proposed $3.5 trillion social policy spending bill Democrats aim to pass in the near future. It is important to note the proposed revisions that took place on September 13, 2021 may change before Democrats propose the final bill. In other words, final details will remain fluid and there will be several revisions to the proposed bill before it is officially submitted in the coming weeks.
In the 881-page draft bill, the overall trajectory of the potential legislation is clear: If the bill is enacted, taxes are going up in various ways for corporations and wealthier taxpayers.
Summary of Proposed Tax Reforms
1031 EXCHANGES & STEP-UP BASIS
Under the House’s draft bill, the House Way and Means Committee excluded Biden’s proposal to change 1031 exchanges and proposal to eliminate step-up basis tax reforms. These non-binding agreements are a positive indication that the Senate is reluctant to make changes to current tax regulations relating to 1031 exchanges and step-up basis. Other tax levies are being considered to fund the $3.5 trillion spending bill.
TOP CAPITAL GAINS TAX RATE INCREASE
Under the House’s draft bill, the capital gains for wealthier taxpayers would increase from 20% to 25%. This has changed from the original proposed increase of 39.6%. The proposal makes the 25% rate effective beginning after September 13, 2021, unless a written binding contract had been entered on or before September 13, 2021.
TOP INDIVIDUAL INCOME TAX RATE INCREASE
Under the House’s draft bill, the rate reverts to 39.6% from 37%. The provision applies to taxable years beginning after December 21, 2021.
Under the House’s draft bill, high income individuals, trusts, and estates are subject to an additional 3% tax on certain income. The tax applies to modified adjusted gross income in excess of $100,000 for any trust of estate, $2.5 million for a married individual filing separately, and $5 million for any other taxpayer.
ESTATE AND GIFT TAX EXEMPTION AMOUNT
Under the House’s draft bill, the proposal is to terminate the double gift and estate tax exemption for estates of decedents dying or gifts made between January 1, 2018 and December 31, 2025. Currently the exemption amount is $11.7 million. If passed, estates of descendants or gifts made during tax years after 12/32/2021 would have an exemption amount of $5 million, plus inflation.
CORPORATE TAX RATES
Under the House’s draft bill, the flat corporate income tax rate will change to a graduate rate structure. 18% on the first $400,000 of income; 21% on amounts more than $400,000 and up to $5 million, and 26.5% on amounts more than $5 million. This has changed from the original proposed increase of 28% on amounts more than $5 million.
Under the House’s draft bill, it is proposed to weaken the preferential tax treatment for carried interest at a favorable long-term capital gains rate. The bill increases the period that an asset must be held from three years to five years. This has changed from the original proposal to eliminate carried interest completely.
In the next few weeks, we will continue to watch the fluid tax proposals. If you are interested in getting more information, feel free to contact SRS NNLG or reach out directly to any of our licensed Real Estate Professionals.