The U.S. House of Representatives Ways and Means Committee (Committee) released its tax proposal (the Proposal). The Proposal will be considered as a part of the budget reconciliation bill to be negotiated by Congress in the coming days and weeks. 

1.  Raise the top marginal individual income tax rate to 39.6%. This rate would apply to married people filing jointly (MFJ) with taxable income in excess of $450,000; to married people filing separately (MFS) with taxable income in excess of $225,000 each; to heads of household (HOH) with taxable income in excess of $425,000, to unmarried people with taxable income in excess of $400,000; and to estates and trusts with taxable income over $12,500.

2.  Increase the 20% capital gains tax rate to 25% effective 9/13/2021, creating a split year with two different tax rates depending on the date the transaction was initiated.

3.  Expand net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with more than $400,000 in taxable income for single filers and more than $500,000 for joint filers.

4.  Cap the qualified business income deduction (QBID) at $500,000 for MFJ, $250,000 each for MFS, $400,000 for single taxpayers, and $10,000 for trusts and estates.

5.  Permanently disallow excess business losses for noncorporate taxpayers.

6.  Add a new tax equal to 3% of a taxpayer’s modified adjusted gross income (MAGI) in excess of $5 million or $2.5 million for MFS.

Regarding estate planning, the proposed plan would do the following:

1.  Revert the unified credit against estate and gift taxes back to $5 million per taxpayer, adjusted for inflation.

2.  Treat sales between a grantor trust and its owner as a sale to a third party – in other words as a taxable sale. This would apply to future trusts and future transfers.

Regarding retirement plans, the following items all refer only to taxpayers who have income in excess of $400,000 (single and MFS), $450,000 (MFJ), or $425,000 (HOH).

1.  If a taxpayer has combined IRA and defined contribution retirement account balances exceeding $10 million at the end of the previous tax year, then the taxpayer will not be allowed to make any Roth or traditional IRA contributions for the current tax year.

2.  If an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a tax year, a minimum distribution (RMD) will be required. The RMD would generally be 50% of the amount by which the individual’s prior-year combined traditional IRAs, Roth IRAs, and defined contribution account balances exceed $10 million. If the combined account balances exceed $20 million, then the RMD would be the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.

3.  Roth conversions would be eliminated for both IRAs and employer-sponsored plans.

For corporations and other businesses, the following would apply:

1.  The 21% corporate income tax rate would go away. It would be replaced by a graduated income tax rate for corporations with less than $10 million. The rates would start at 18% on the first $400,000. Income of $400,001 to $5 million would be 21%. Income from $5,000,001 to $10 million would be 26.5%. Corporations with income above $10 million would be taxed at a flat 26.5%, losing the benefit of the graduated rates.

2.  The employer credit for wages paid to employees during family and medical leave would end in 2022.

3.  The work opportunity tax credit (WOTC) would increase to 50% for the first $10,000 in wages through 12/31/2023 for all WOTC targeted groups except for summer youth employees.

4.  Eligible S corporations that were S corporations on 5/13/1996 would be allowed to reorganize as partnerships without triggering a tax.