A couple of weeks back the U.S. Congress pushed ahead with the $3.5 Trillion Spending Plan called the Build Back Better Plan. A passage deadline of September 27th was set, and now we’re in for politicking back and forth from the two parties. With a big price tag on the projects in the plan comes the question: How will it be funded? If your immediate thought is higher taxes, you’re correct. On Monday, the House Ways and Means committee published their 800 page tax proposal. While there could be many changes to the original tax proposal before (and if) it becomes law, it’s a good time to see what’s inside of the proposed bill.
From the planning side, here are a couple of areas that will impact people the most.
Corporate and Individual Tax Rates
The House proposal would take steps to reverse most of the 2017 Republican tax cuts, but probably didn’t go as far as President Biden initially hoped.
Corporate tax rates would jump to 26.5%, after the GOP slashed it to 21% from 35%.
In 2017, the top individual tax bracket was cut to 37%. Under the new proposal the rate would be restored to 39.6%
Changes to Capital Gains Tax Rates
Earlier in the year there was talk that capital gains tax rates would increase to the same level as ordinary income rates. Luckily, the proposal has capital gains tax rates increasing from the top current rate of 20% to 25% if your income is $400,000 if you file single, and $450,000 if you are married and file jointly.
Most changes to the tax code are set to take place at some point in the future, usually January 1st. The capital gains tax rate change would go into effect immediately — not immediately after the bill is passed, immediately after the proposal was released.
New 3% Surtax for Ultra-High Income Taxpayers
Section 138026 of the proposal would create a new 3% surtax on ultra-high-income taxpayers.
The government likes surtaxes: See the Medicare Investment Surtax. That’s because surtaxes are harder to avoid using deductions. Also, it’s an “out” in a way, where the government can say, “ We only increased the top tax bracket from 37% to 39.6% and not 42.6%.”
This surtax would impact people earning over $5 million annually. While individual taxpayers would rarely be subject to the surtax, there may be instances where the sale of a large piece of property or business would trigger it. Contrarily, trusts are subject to this surtax if trust income generates over $100,000 of income.
Elimination of the Backdoor Roth IRA
We’re big proponents of backdoor Roth IRAs. This is a strategy that’s popular with “regular” taxpayers, not just the high income earners that the bill is targeting.
Get instructions on how to enable our Flash News Briefing skill to your Amazon devices:
