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House Ways & Means Committee Tax Proposal – Individual Income Tax

on Wednesday, 15 September 2021 in The Closer - M&A, Securities and Corporate Counsel: Kevin P. Tracy, Editor

On September 13, 2021, the U.S. Ways and Means Committee released draft legislation advancing a number of tax increases and changes.  The proposed changes would help to pay for the social and economic policies advanced in the $3.5 trillion budget reconciliation package Congress has been working on, which the Democrats and President Biden hope to pass this fall. The text of the proposals are here.  

Note:  the Ways & Means Committee’s proposals are still being crafted and finalized, and these proposals still need to be crafted into legislation.  Accordingly, this article should be used as a view to what tax changes may be coming on the horizon legislatively.  

A few of the major changes affecting individual taxpayers are summarized below:

i. Increase in Top Marginal Individual Income Tax Rate.

The Ways and Means Committee has proposed an increase to the top marginal individual tax rate from 37 percent to 39.6 percent for married individuals filing jointly with taxable income over $450,000, heads of households with taxable income over $425,000, unmarried individuals with taxable income over $400,000, married individuals filing separate returns with taxable income over $225,000, and estates and trusts with taxable income over $12,500.

A separate proposal would add an additional 3% surtax on certain individuals (see section vi below).

ii. Increase in Capital Gains Rate for Certain High Income Individuals.

The Committee has proposed an increase in the top capital gains rate in Section 1(h)(1)(D) from 20 percent to 25 percent. If passed, this amendment will apply for periods ending after the date of introduction. A transition rule would apply providing the current statutory rate of 20 percent to continue to apply to gains and losses for the portion of the taxable year prior to the date of introduction.

This rate would also be subject to the 3% surtax for taxpayers with AGI in excess of $5 million and would also be subject to the 3.8% NIIT discussed below.

iii. Application of Net Investment Income Tax to Trade or Business Income of Certain High Income Individuals.

The proposal would expand the net investment income tax (the “NIIT”) to cover any “net investment income” derived in the ordinary course of a trade or business.  The additional NIIT would apply for married individuals filing jointly with taxable income over $500,000 and unmarried individuals with taxable income over $400,000. This provision also applies to trusts and estates.

Essentially, this change would subject all earnings from pass-through entities to either the 3.8 percent self-employment Medicare tax or the 3.8 percent net investment income tax, without taking into account whether the income is from a passive or nonpassive activity.

iv. Limitation on Deduction of Qualified Business Income for Certain High Income Individuals.

The Ways and Means Committee has proposed an amendment to Section 199A that would set the maximum allowable deduction for qualified business income to $500,000 for married individuals filing jointly; to $400,000 for unmarried individuals; and to $250,000 for married individuals filing separately; and to $10,000 for trusts and estates.

v. Limitations on Excess Business Losses of Noncorporate Taxpayers.

The proposal would amend Section 461(1) to permanently disallow excess business losses for non-corporate taxpayers. The provision would allow taxpayers who have losses that are disallowed to carry those losses forward to the next taxable year.

vi. Surcharge on High Income Individuals, Trusts, and Estates.

The Ways and Means Committee has proposed adding Section 1A, which would impose a new tax equal to three percent of taxpayer’s modified adjusted gross income in excess of $5,000,000 for married individuals filing jointly and $2.5 million for married individuals filing separately. Modified adjusted gross income would mean adjusted gross income reduced by any deduction allowed for investment interest.

As the proposed legislation has only been approved at the Committee level, it remains somewhat speculative.  Before passing into law, the proposed legislation will be subject to review and approval by both Houses of Congress and the President.  Nonetheless, a shakeup of the tax rules applicable to high-income individuals seems probable in the near future. 

Emily S. Tosoni

Hannah Fischer Frey

Jesse D. Sitz

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