Breaking Down the Latest Developments and How They Could Affect You
A much-anticipated tax legislation update arrived on Thursday, October 28th when White House officials released a 10-year, $1.75 trillion revenue package proposal.1 And while the administration’s proposals still target high-income earners and corporations for a revenue raise, several ideas proposed in September2 didn’t survive the chopping block. Here is a summary of the most significant tax-related items in President Biden’s newly proposed plan.
Corporate Tax Reform
15% Corporate Minimum Tax
- All corporations earning more than $1 billion a year in profits would be subject to a minimum tax of 15%.
- The tax would be assessed on book income, rather than taxable income, and would eliminate opportunities for corporations to reduce taxable earnings each year and avoid income tax.
- The concern is this could adversely impact the number of large corporations that pursue income tax credits due to the potentially significant reduction in value.
Increased Foreign Tax Rates
- The White House has proposed an increase in the global minimum tax rate to 15% and shifts to a “country-by-country” system to prevent corporations from being able to take advantage of lesser “blended” tax rates.
- President Biden’s administration is seeking to establish a form of the corporate minimum tax (which has already been agreed to by several countries). It is designed to help reduce the benefit of a multinational company relocating their headquarters to a foreign country in response to the increase in the global minimum tax rate.
Tax Stock Buybacks
- A company that buys back its own stock would be taxed in the same manner as corporate dividends. In addition, the buyback would face a new excise tax of 1%.
Individual Tax Reform
Expansion of the Net Investment Income Tax (NIIT)
- As included in the previous proposal, the White House is looking to subject the profits of “pass-through” entities, most notably S corporations and partnerships, to the net investment income tax of 3.8%.
- It has been proposed to apply to taxpayers with taxable income in excess of $400,000 (single filer) or $500,000 (joint filer).
Creation of a Surtax
- In a slight modification to the initial surtax proposal by Democrats, President Biden’s proposal creates a 5% surtax on taxpayers with adjusted gross income (AGI) above $10 million.
- An additional 3% surtax would be applied to taxpayers with adjusted gross income above $25 million.
- By assessing the surtax on taxpayer AGI, the proposal eliminates the ability for taxpayers to utilize charitable donations or other below-the-line deductions to avoid the additional tax.
Extension of the Child Tax Credit
- The changes made to the Child Tax Credit, which increased the credit for children under six by $1,600 and for children aged six to 16 by $1,000, are proposed to last through 2022.
- The advance payment feature that began in July 2021 would be split over the entirety of 2022.
- The increased credit begins phasing out at $112,000 modified adjusted gross income (MAGI) for single filers or $150,000 MAGI for married taxpayers filing jointly.
- The original credit of $2,000 per child phases out beginning at $200,000 MAGI for single filers or $400,000 MAGI for married taxpayers filing jointly.
- For example, a married taxpayer with a child under six years of age whose income is under $150,000 would receive the full $3,600 credit via monthly $300 payments in 2022.
Make Permanent Excess Business Loss Limitations
- Under current law, business losses are eligible to offset other types of income for noncorporate taxpayers.
- Losses are limited to $540,000 (married filing jointly) and $262,000 (all other filers) in 2021. Losses exceeding these limits are carried forward to future tax periods.
- The new proposal would make the provision permanent.
Limitation on Section 1202 Stock Exclusion
- The 75% and 100% Section 1202 special exclusion rates for qualified small business stock would no longer exist for taxpayers with AGI of $400,000 or higher, or for trusts and estates.
- The 50% exclusion, however, would still be available.
- It is proposed to be effective as of September 13, 2021.
Internal Revenue Service Modifications
The White House believes the single largest revenue producer in the proposed tax legislation will be closing the gap between tax revenue that is collected and tax revenue that should be collected. Through a combination of technology enhancements and increased personnel, the IRS would theoretically be able to eliminate many significant cases of underreporting. If passed, it is expected to lead to a significant increase in IRS audits.
Previous discussions predominantly revolved around an increased top marginal tax rate for individuals, increased capital gains rate, increased corporate tax rate, and changes to estate and gift taxes – notably the elimination of the step-up in basis and the triggering of tax on unrealized gains at death. However, the White House’s release does not mention any of these proposals, largely due to opposition from Senator Kyrsten Sinema (D-Arizona). Based on this, it seems as though the support necessary to pass any of these suggested provisions is unlikely to be achieved, at least in 2021.
Attention will now turn to Congress as their approval will be required to pass the Build Back Better spending package. Creative Planning will continue to proactively monitor tax developments as they unfold and keep you informed. Please reach out to your wealth manager with questions you have surrounding the changes to the proposed tax legislation, or for any other financial or tax matter.