On September 13, 2021, the House Ways and Means Committee announced a drastic change in tax law. The changes include some new and other provisions that are inconsistent with President Biden’s $ 3.5 trillion plan. Some of these were expected, but others were a bit surprising. The following is a summary of the relevant parts of the proposal.
Corporate tax: The flat 21% corporate tax rate will be replaced by the new progressive tax rate system. Companies with taxable income of less than $ 400,000 will be reduced at a tax rate of 18%. For companies with taxable income of $ 400,000 to $ 5 million, the tax rate remains at 21%. For corporate taxable income above $ 5 million and up to $ 10 million, the progressive tax rate will be phased out and the maximum tax rate for all cases above $ 10 million will be 26.5%. This allows you to keep the rates virtually the same, or actually lower the rates for smaller businesses. Personal Service Corporation (think PC) is not subject to gradual charges. The Small Business Exclusion (Exclusion from Section 1202) is not available to taxpayers with adjusted total income above $ 400,000.
Wash sale (bitcoin loophole): If you sell your securities for a loss and buy back a substantially equivalent security within 30 days, you will not be able to deduct the loss. This rule did not apply to commodities, currencies, or digital assets. The proposed bill adds these assets to the Wash Sale rules.
Individual charges.. The maximum personal tax rate will be increased to 39.6% for taxpayers with taxable income above $ 450,000 and for joint taxpayers with marriage filings and single taxpayers with taxable income above $ 400,000. ($ 425,000 for head of household, $ 225,000 for individual marriage declarations, $ 12,500 for real estate and trusts.)
Capital gain. The proposed rule raises the maximum capital gains tax rate from the current maximum of 20% to 25%. This rule is valid from the date of introduction, but a 20% rate applies to transactions up to the date of introduction, including transactions entered into in binding agreements signed prior to the date of introduction. The dreaded proposed carryover basic rules are not dealt with.
Eligible business income. 20% Eligible Business Income (QBI) Deduction for Pass-Through Entities Limited to $ 500,000 for Joint Filing, $ 400,000 for Individual Filing, $ 225,000 for Individual Marriage Filing, and $ 10,000 for Trust or Real Estate Will be done.
High-income sir tax. The new provision adds a 3% additional tax to the adjusted total income of taxpayers over $ 5 million. This will raise the maximum effective marginal tax rate to 42.6%.
IRA for high-income earners.. This new provision prohibits losses or contributions to traditional IRAs if the sum of all IRA and eligible plan assets exceeds $ 10 million. This limit applies to taxpayers with taxable income above $ 450,000 and single taxpayers with taxable income above $ 400,000. ($ 425,000 for head of household, $ 225,000 for marriage declaration)
The minimum allocation required for a large IRA. Another new provision is to require the minimum allocation required for IRAs with balances above $ 10 million the year after the account reaches that level. This provision applies to taxpayers with taxable income of more than $ 450,000 and single taxpayers with taxable income of more than $ 400,000 for married tax returns. ($ 425,000 for heads of household and $ 225,000 for individual marriage declarations.) RMDs are 50% of an IRA over $ 10 million. If your IRA balance exceeds $ 20 million, your RMD will be 100% of the excess. This requires a large amount of RMD, as Peter Thiel is said to have a $ 5 billion Roth IRA, but Roth distribution is tax exempt. Berkshire Hathaway’s Ted Weschler is also said to have a $ 264 million Roth IRA.
Backdoor Loss Limited. Roth IRAs have traditionally had income limits that would prevent them from making donations. However, this limitation can be circumvented by making a non-deductible IRA contribution and converting it to Roth. This was called the “backdoor” loss. This proposal closes the backdoor loss for taxpayers with taxable income above $ 450,000 for co-taxpayers with married filings and single taxpayers with taxable income above $ 400,000. ($ 425,000 for head of household, $ 225,000 for marriage declaration)
There are many other provisions, including some international tax rate revisions. Tobacco taxes, including “nicotine products,” are currently being raised. Remember that this is just a committee proposal. Tax bills are often changed or replaced until the law is actually enacted. But the move shows that something is going on in Washington and many concerns are raising taxes. stay tuned. By the way, please note that most regulations will be effective after 12/31/21 (except for the increase in capital gains). Therefore, this is the time to consider backdoor loss and other time-sensitive planning strategies. As always, I try to answer the question by email to firstname.lastname@example.org. A free ebook about IRA, including how to perform a backdoor loss, is available here.