On September 25th, many of President Biden’s tax proposals moved closer to becoming law. The House Budget Committee’s vote to move forward with a $3.5 trillion spending bill puts corporations and individuals squarely in the crosshairs. In addition to raising tax rates, the legislation would create new restrictions on savings in retirement accounts and limit the usefulness of trusts in estate planning. As the House debates substantial tax increases, individuals and business owners should plan for higher tax rates.
Corporate and Individual Tax Increases
If passed as currently written, the new legislation will increase corporate taxes from the current 20% level to 26.5% for corporate income over $5 million. Corporate earnings under $5 million would be subject to a new graduated rate schedule, starting at 16% under $400,000. A tax rate of 21% would apply to income up to $5 million. Corporations classified as “personal service corporations” would pay the 26.5% tax rate on all of their income. Some professions impacted by this tax hike include accounting and law firms, medical and veterinary practices, and engineering and architectural companies.
The new legislation will also hit high-income individuals with higher taxes. The top individual tax rate would go up to 39.6% for married couples earning over $450,000 and single taxpayers earning more than $400,000. The highest long-term capital gains tax rate would be raised from 20% to 25% and made retroactive to September 13th, 2021. Individuals earning over $5 million would be subject to a new 3% tax, on top of the other tax increases. The Affordable Care Act’s 3.8% tax on net investment income would expand to include income from many self-employed business owners. The Qualified Business Income Deduction, created by 2017’s Tax Cuts and Jobs Act, would be subject to new limits.
New Rules for Retirement Plans, and Estate and Gift Tax Hikes
Several new retirement plan rules will apply to high-income taxpayers. Taxpayers with retirement plan balances over $10 million will not be allowed to make additional contributions. They would also be required to take immediate distributions of 50% of their retirement plan balances over this limit. Taxpayers with over $20 million in retirement accounts would be required to take 100% distributions from their Roth IRAs. In addition, high-income taxpayers would be prohibited from converting traditional IRAs to Roth IRAs.
Estate and gift taxes would also see significant increases. Current law excludes the first $11.7 million of assets from estate taxes, while the new legislation would cut this amount in half. It would also limit using trusts in estate planning and assess estate taxes on many trust-owned assets currently not subject to it.
Together, these tax increases would be the most significant tax hikes in many years. Although slated to be debated by the House, this legislation is still a long way from becoming law. The bill will likely see many provisions added, removed, or changed during the legislative process. This bill does bring into focus the most likely changes to individual and corporate taxes. Now is the time to start thinking about how these changes could impact you and consider planning moves if the bill becomes law. In complicated situations like these, it is wise to seek advice from a financial planner who is also a licensed tax practitioner.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer