Democratic lawmakers on the House Ways and Means Committee have advanced legislation containing the tax elements of President Biden’s Build Back Better agenda. The draft legislation could be modified by the House Rules Committee before moving to the House floor and may differ from what Senators are preparing. Outlined below is a high-level overview of some key tax provisions affecting businesses and individuals:
Tax provisions affecting individuals
- Individual Tax Rate – the proposal would increase the top marginal individual rate to 39.6% from 37%. If enacted, the new rate would be applied to tax years beginning after December 31, 2021.
- Capital gain and qualified dividend tax rate – tax rate on long term capital gains realized and qualified dividends received after September 13, 2021 would be increased to 25% from 20%.
- 3% surcharge – Individuals with modified adjusted gross income in excess of $5M ($2.5M for MFS) will be imposed to a new 3% surcharge. If enacted, the new surcharge applies to tax year beginning after December 31, 2021.
- Estate and gift tax exemption – the unified credit would be reduced back to $5M from $10M (indexed for inflation) for estate and gift transfer made after December 31, 2021.
Tax provisions affecting businesses
- Corporate tax rate – The proposal would introduce a graduated federal tax rate for corporations: 18% applies to first $400,000 of income, 21% applies to income in excess of $400,000 and up to $5M, 26.5% applies to income in excess of $5M. A surcharge of lesser of 3% of the excess or $287,000 applies if the corporation has more than $10M of income. If enacted, rate increase is effective January 1, 2022.
- FDII deduction decrease – the proposal would reduce the section 250 deduction for FDII from 37.5% to 21.875% and the section 250 deduction for GILTI from 50% to 37.5%. If enacted, the change is effective for tax years beginning after December 31, 2021.
- GILTI inclusion – the bill would provide for country-by-county application of the GILTI and reduce qualified business asset investment deduction from 10% to 5%.
Additionally, the proposal contains provisions substantially changing the Foreign Tax Credit and Subpart F inclusion regime. The proposal must be approved by the Congress and taxpayers should continually monitor legislative process.