Washington Policy Research – Nov. 16, 2021

When it became clear that proposed tax rate increases and estate tax changes were unlikely to pass, Congressional Democrats came up with an alternative plan.

A Revamped Approach to Raising Taxes

Back in September, the House of Representatives proposed tax increases on income, capital gains, dividends, small businesses (that would kick in at roughly $400k), and corporations, as well as estate tax reform (exemption lowered from $11M to $6.5M) and grantor trust reform. Over the past eight weeks, however, the politics have changed. When it became clear that the tax rate increases and estate tax changes were unlikely to pass, Congressional Democrats came up with an alternative way to raise money: taxing a smaller set of wealthy taxpayers with a surtax on their total income.

Latest Version Focuses on Wealth Surtax

The latest version of the reconciliation bill, which is expected to be voted on in the House in November, no longer taxes income, capital gains, dividends, or estates directly. Instead, a single taxpayer with $5M of total income or married couple with $10M of income will face a surtax of 5%. If the taxpayers’ income exceeds $12.5M (single) or $25M (married), the surtax increases to 8%. This surtax is applied on all income above the threshold with no deductions. As a result, capital gains above the threshold would face the additional 5% or 8% levy. The surtax would also apply to the estate or trust of a taxpayer with modified adjusted gross income above $200,000 and $500,000. Small businesses paying the individual income tax would still be subject to the originally proposed 3.8% Medicare tax although the small business deduction would not be eliminated.

IRAs Remain a Target

Individual Retirement Accounts of the wealthy remain a target. Congress did remove a provision forcing IRA holders to liquidate private (illiquid) securities. However, the proposal caps IRA contributions once the assets in an individual’s retirement plans reach $10 million and requires minimum distributions for those IRAs. The new proposal also includes workplace 401(k) Roth plans in calculating the total holdings. However, these provisions do not go into effect until 2029.

November House Reconciliation Bill Details
It is widely expected these proposed tax changes will pass the House sometime in November, but that is just the first step. The Senate will then also need to consider the legislation and further changes can be made. However, we believe at this point that the structure of the House bill is likely to remain intact. We will be watching these developments closely as activity picks up heading into the holidays.


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