On September 13, 2021, the House Ways and Means Committee announced sweeping changes to the tax code. The changes include brand new provisions and others that conflict with President Bidens’ $ 3.5 trillion plan. Some of them were expected, others were a bit surprising. Here is a summary of some of the relevant parts of the proposal:
Society taxes: The fixed rate of 21% of corporate tax would be replaced by a new progressive rate system. Corporations with taxable income of less than $ 400,000 would have a rate of 18%, a decrease. For corporations with taxable income between $ 400,000 and $ 5 million, this rate would remain at 21%. On corporate taxable income over $ 5 million and up to $ 10 million, the graduated rate would be phased out and the maximum rate would be 26.5% on anything over $ 10 million. This effectively keeps the rate the same or actually reduces the small business rate. Personal service companies (think PCs) are not eligible for the graduated rate. The small business exclusion (the section 1202 exclusion) would not be available to taxpayers with adjusted gross income greater than $ 400,000.
Wash sales (the Bitcoin loophole): If you sell a security at a loss and redeem a substantially equal security within 30 days, the loss is not deductible. This rule did not apply to commodities, currencies or digital assets. The proposed bill adds these assets to the washing sale rules.
Individual rates. The highest individual marginal rate would be increased to 39.6% for taxpayers with taxable income greater than $ 450,000 for married taxpayers declaring spouses and singles with taxable income greater than $ 400,000. ($ 425,000 for heads of households, $ 225,000 for separate deposit for married persons, and $ 12,500 for estates and trusts.)
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Capital gains. The proposed rules would increase the maximum capital gains tax rate from the current maximum of 20% to 25%. The rule is effective from the date of introduction, but the 20% rate would apply to transactions until the date of introduction, including those entered into with a binding contract signed before the date of introduction. The dreaded basic deferral rule is not discussed.
Qualifying business income. The 20% qualifying business income (QBI) deduction for flow-through entities would be limited to $ 500,000 for a joint return, $ 400,000 for an individual return, $ 225,000 for a separate filing and 10,000 $ for a trust or an estate.
High income surcharge. This new provision would add a 3% surtax on the adjusted gross income of taxpayers over $ 5 million. This brings the maximum effective marginal rate to 42.6%.
IRAs for high income earners. This new provision would prohibit contributions to a Roth or conventional IRA if the total value of all IRA and qualifying plan assets exceeds $ 10 million. The limit applies to taxpayers with taxable income greater than $ 450,000 for married taxpayers declaring spouses and singles with taxable income greater than $ 400,000. ($ 425,000 for heads of household, $ 225,000 for marriages filed separately.)
Minimum Distributions Required on Large IRAs. Another new provision is to require a minimum required distribution on IRAs with a balance greater than $ 10 million in the year following the year the account reaches that level. The provision applies to taxpayers with taxable income greater than $ 450,000 for married taxpayers declaring spouses and unmarried with taxable income greater than $ 400,000. ($ 425,000 for heads of households, $ 225,000 for marriages filed separately.) The RMD would be 50% of the amount the IRA exceeded by $ 10 million. If the IRA balance is greater than $ 20 million, the RMD would be 100% of the surplus. Pierre Thiel would have a Roth IRA of $ 5 billion, which would require a large RMD, but Roth distributions are tax exempt. Ted Weschler of Berkshire Hathaway is also said to have a Roth IRA of $ 264 million.
Roths Limited rear door. Roth IRAs have traditionally had an income limit above which one could not make contributions. However, this limit could be bypassed by making a non-deductible IRA contribution and converting it to Roth. It was called a Roth backdoor. The proposal would close the Roths backdoor to taxpayers with taxable income greater than $ 450,000 and married and single taxpayers with taxable income greater than $ 400,000. ($ 425,000 for heads of household, $ 225,000 for marriages filed separately.)
There are many other provisions, including the revision of some international tax rates. There is an increase in the tobacco tax, which now includes nicotine products. Keep in mind that this is only a committee proposal and that tax invoices are often amended and reworked until the law is actually passed. But the motion indicates that something is brewing in Washington and a lot of concerns about tax increases. Stay tuned. By the way, note that most of the provisions come into effect after 12/31/21 (with the exception of the increase in capital gains), so this will be the time to look at the Back Door Roths and others. urgent planning strategies. As always, I will try to answer questions by emailing [email protected] Get our free IRA e-book (including how to run a Roth backdoor) here.
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