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Are New Tax Hikes on the Way?

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The Biden administration is supporting a massive infrastructure bill that would cover heavy expenditures ranging from highway repairs to high-speed internet services to climate control and more. Although the exact cost is not yet settled, it will be hundreds of billions of dollars, at least, and it's likely that taxes will pay the tab.

Sep 15th 2021
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On September 13, the chairperson of the House Committee on Ways and Means, the chief tax-writing committee of the U.S. Congress, released details about proposals aimed at generating more tax revenue for the government’s coffers. It’s estimated that the plan would raise taxes by about $2.1 trillion over 10 years and use roughly $900 billion for the infrastructure efforts. This is the first definitive step in Congress toward tax hikes that would affect corporations and high-income individual taxpayers.

Although the plan is likely to be revised several times before any tax legislation is enacted, if ever, it’s important to examine the key changes that are being proposed. 

Individual tax rates: Since his presidential campaign, President Biden has maintained that any tax increase for individuals wouldn’t apply to those earning less than $400,000 annually. The proposed plan would restore the top 39.6-percent bracket, as Biden had proposed, for incomes above $400,000 for single filers and $450,000 for joint filers. (Currently, the top rate is 37 percent.) But there’s another wrinkle: The plan would impose a three-percent surtax for those with incomes above $5 million.

Corporate tax rates: The Tax Cuts and Jobs Act (TCJA) lowered tax rates for corporations and installed a flat 21-percent rate. Previously, the top rate was 35 percent. The House plan would raise it to 26.5 percent, which is still lower than President Biden’s proposed rate of 28 percent.

Capital gains: Under current law, the maximum tax rate on long-term capital gains is 15 percent, or 20 percent for certain high-income taxpayers. The House plan increases the top rate to 25 percent, but it doesn’t reflect Biden’s proposals to tax gains at ordinary income rates or to tax unrealized capital gains at death. (Note: These options may still be on the table.)

Child Tax Credit: Recent legislation has enhanced the benefits of the Child Tax Credit (CTC). In fact, some families are currently receiving monthly advance CTC payments. The proposed plan would make the credit fully refundable on a permanent basis and extend certain other improvements through 2025.

SALT deduction: In a controversial provision, the TCJA limited the annual deduction for state and local tax (SALT) payments to $10,000. Many congressional Democrats, particularly those in high-tax states, are pushing for a repeal or modification of the SALT cap. But the House's plan doesn’t address the issue—yet.

QBI deduction: The TCJA created the qualified business income (QBI) deduction for pass-through entities like S corporations and partnerships as well as self-employed taxpayers. The QBI deduction is equal to 20 percent of business income subject to phase-outs in dollar ranges and other special rules. The House plan further limits the tax benefits for high-income earners, but preserves the QBI deduction, at least for the time being.

Carried interest: The tax break for carried interest that is available to hedge managers has been in the crosshairs of tax law writers for years. Essentially, it allows these folks to treat part of their compensation as a low-taxed capital gain instead of ordinary income. The House plan would require taxpayers to hold the investments for five years instead of the current three-year limit.

Is that all? Not by a long shot. The initial plan includes numerous other provisions such as revamping international taxation rules and dedicating more resources to IRS enforcement. Of course, as noted above, you can expect plenty of revisions before any bill is finalized, and we will continue to monitor the progress.

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