From one day to the next, it’s not clear from the news which tax proposals are moving forward and which ones are stalled out. We are keeping up with all the tax-related changes so we can continue to provide our clients the best advice on their individual tax situations.
Earlier this year, President Biden released a proposed budget, including plans for tax increases and tax credits affecting the next 10 years. After evaluating the proposed budget and tax changes, the U.S. Treasury Department released its “Green Book,” which explains the tax-related proposals. In mid-September, House Democrats put forward their own tax plans. In this blog post, we compare the two plans by explaining five key provisions and how they might affect our clients.
Long-term capital gains rates
Currently, long-term capital gains rates are 15% for individual filers whose taxable income is $80,000 or more but less than $441,450; less than $496,600 for those married filing jointly or qualifying widow(er); less than $469,050 for head of household, or $248,300 for those married filing separately. For those making more than these thresholds, the current rate is 20%.
The original Biden proposal, detailed in the Green Book, would raise the 20% rate to 39.6%. The House proposal would increase the 20% rate to 25%.
Top individual tax rate
The highest tax rate for individuals is currently 37%. Both the Green Book and House plans would increase this rate to 39.6%, which is what the rate was prior to the passage of the Tax Cuts and Jobs Act in 2017.
Corporate tax rate
The current highest marginal tax rate applied to corporations is 21%, lowered from 35% by the Tax Cuts and Jobs Act of 2017. The Green Book proposes raising the corporate tax rate from 21% to 28%, and the House plan proposes raising it to 26.5%.
Excess business loss limitation
Both the House plan and the Green Book would make permanent a provision of the tax code that was set to expire in 2026, the limit on excess business losses for non-corporate taxpayers. Taxpayers whose losses are disallowed would be able to carry over those losses to the next taxable year.
1031 (Like-kind) exchanges
The Green Book proposal would eliminate deferral of gains greater than $500,000, which would minimize the benefit of a tax break used by real estate investors that allows them to reinvest income from selling a property into another property without paying taxes on the gain from the original sale. The House plan leaves out this provision and would allow the current 1031 exchange rules to continue.
Pass-through income subject to 3.8% NIIT or SECA tax
Currently, S-corporation shareholders and limited partners are not subject to self-employment tax on pass-through income. (Note that pass-through income is income from an S-corporation, LLC, sole proprietorship, LLP or partnership. It is normally taxed at the individual level, not the business level.) The Green Book and the House plans propose a change: taxpayers with adjusted gross income of more than $400,000 would be subject to the 3.8% Medicare tax. This would ensure that all trade or business income of high-income taxpayers is subject to the 3.8 percent Medicare tax, either through the net investment income tax (NIIT) or the Self-Employment Contributions Act (SECA) tax.
We know that keeping up with the new proposals is challenging, so if you have questions on what might be on the horizon for your taxes and what you can do to navigate the changes, reach out to us at info@sbfcpa.com.