If you’re confused about what the Democrats plan to include in the latest tax reform proposals, you’re not alone. The proposals are coming in fast and furious, and in many cases are shot down by others in the Democratic party the same day they are issued. Summarizing President Biden, when you have a 50/50 split in the Senate, every Senator is a President.
Here’s a snapshot of where we’ve been and, more importantly, where we are today. On March 31, 2021, President Biden proposed a raft of tax increases to individuals and to businesses when he outlined the “Build Back Better” recovery plan, consisting of the American Jobs Plan and The Made in America Tax Plan. On September 13, 2021, the House Ways and Means Committee released a tax proposal (including legislative text, section-by-section summary, and press release) that the nonpartisan Joint Committee on Taxation (JCT) estimates would raise about $2 trillion. Many of those proposals tracked the President’s proposals. That’s when things started to get really interesting.
In response to numerous tax policy objections to the House proposal by Senators Manchin (D-WV) and Sinema (D-AZ), and in particular Senator Sinema’s objections to any individual or corporate tax rate increases, Democratic Senators in late October released a corporate profits minimum tax proposal (including legislative text and a 1-page summary), a billionaire’s income tax (including legislative text, 1-page description, and section-by-section summary), and the House issued a revised version of its Build Back Better Act (including legislative text), which deleted many of the “offending” provisions and added new ones that it thought would be sufficient to overcome the objections raised by these Senators.
Then, on October 28, 2021, the White House issued a press release detailing its Build Back Better Framework. This proposal appeared to simplify the landscape by narrowing greatly the number of tax proposals under consideration. It included the 15% corporate minimum tax, stock buybacks tax, international tax reform, tax rate surcharge for high-income taxpayers, broadening the net investment income tax base for high-income taxpayers, limiting excess business losses for high-income taxpayers, and investments in the IRS to close the tax gap.
Around the same general timeframe, various other proposals were issued, but many of them appeared to go nowhere. For example, on August 25, 2021, Democratic Senators released a proposal to overhaul the U.S international tax system (including legislative text and section-by-section summary), and on September 10, 2021, they released (i) a proposal to “close loopholes” regarding the taxation of pass-through entities (including section-by-section summary and 1-page summary), (ii) a proposal to provide tax credits and incentives (including legislative text and press release), and (iii) a proposal to impose a 2% excise tax on stock buybacks by publicly-traded corporations (including legislative text and press release).
Where We Are Today With Tax Provisions
On November 3, 2021, the House release a “managers amendment” that restored many of the proposals from House proposal on September 13th and included some of the provisions that were in the White House’s framework. The proposal was memorialized in legislative text and a section-by-section summary, though the summary is a staggering 180 pages long. The JCT estimates that the tax provisions will raise about $1.5 trillion. Below is a list of some of the tax provisions that might be of interest to readers:
- Expansion of the state and local tax (SALT) deduction limit from $10,000 to $72,500, starting in 2021 and extending through 2031 (note Senator Bernie Sanders (D-VT) has already come out against this provision except for taxpayers making less than $400K/year)
- Addition of new tax rate surcharges (e., tax brackets) for individuals making more than $10M (5% surcharge) and more than $25M (another 3% surcharge), starting in 2022
- Elimination of 75% and 100% qualified small business stock (QSBS) exclusion rates for taxpayers with AGI ≥ $400K (retroactive to sales after 9/13/2021, subject to a binding contract exception)
- Addition of digital assets (g., cryptocurrency) to wash sale and constructive sale rules (and commodities and currencies to wash sale rule)
- Expansion of net investment income (NII) tax to include NII derived in the ordinary course of a trade or business income for individual taxpayers with taxable income over $400K (with an exception for wages subject to FICA taxes)
- Permanently limitation of excess business losses (e., net business deductions in excess of business income) for non-corporate taxpayers, starting in 2021
- Exclusion of Federal Pell grants from gross income through 2025
- Limitation on further contributions to IRAs/Roth IRAs for individual taxpayers with AGI ≥ $400K where the account balance would exceed or further exceed $10 million (effective starting in 2029)
- Increase to required minimum distributions (RMDs) for these large accounts, starting in 2029
- Elimination of back-door Roth conversions with after-tax funds after 2021
- Elimination of regular Roth conversions for IRAs and employer sponsored plans for taxpayers with taxable income over $400K, starting in 2032
- 15% prohibited transactions tax applies if an IRA holds a FSC or a DISC
- 15% corporate alternative minimum tax on adjusted book income of corporations with 3-year average annual income over $1B
- 1% stock buyback excise tax applicable to publicly-traded U.S. corporations (reduced by new issuances to the public and to employees)
- Plaintiff’s attorneys can deduct out-of-pocket litigation costs relating to contingency-fee cases in the year incurred rather than in the year the litigation concludes
- International tax reform, including interest expense disallowance and changes to FDII, GILTI, BEAT, CFC, and FTC rules
The proposal also would provide funds to the IRS for taxpayer services ($2B), enforcement ($45B), operations support ($27B), and business systems modernization ($5B).
Contact Withum’s team of professionals if you have any questions or concerns.