Illustration by Chris Gash
Higher taxes are on the way for the very wealthy, and corporations. But when these changes begin, and what they’ll involve, remain unsettled as lawmakers debate how to pay for President Joe Biden’s $1.8 trillion budget bill.
The House passed its version of the expansive social spending and climate plan on Nov. 19, despite a report from the Congressional Budget Office that the bill would cost closer to $2.4 trillion and increase the federal budget deficit by $160 billion over 10 years.
The CBO analysis, however, didn’t include revenue from a proposed provision to beef up enforcement at the Internal Revenue Service. That, Democrats estimate—along with $1.5 trillion raised through tax increases—would pay for the bill’s broad reach.
Next, the bill moves to the Senate, where it is all but certain that legislative wrangling will continue and changes will be made. Support from all Democrats will be required for the bill to pass in the 50-50 Senate, where all Republicans are expected to vote against it. In the event of a tie, Vice President Kamala Harris would cast a vote, presumably for a Democratic win.
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The Senate may still vote on the bill prior to year end, but a full legislative plate could mean postponing a vote until early next year, says Garrett Watson, a senior policy analyst at the Tax Foundation.
Perhaps the biggest sticking point in the Senate is the House proposal to raise the $10,000 limitation on state and local tax deductions. The so-called SALT cap was imposed by the Tax Cuts and Jobs Act in 2018. The House bill would allow up to $80,000 in SALT deductions beginning this year—2021—through 2031, at which point it would fall back to $10,000.
While lawmakers from high-tax states such as New York and New Jersey say they won’t support a bill that doesn’t raise the SALT cap, a bump to $80,000 would cut taxes almost exclusively for the wealthiest taxpayers and provide no relief to most middle-income folks, according to the Tax Policy Center.
Under a $80,000 cap, 1.6% of households with income of $54,000 to $96,000 would receive an average benefit of $20 on their 2021 tax returns, while more than three-quarters of households in the top quintile of earners would benefit with an average $2,040 tax savings, according to the Tax Policy Center.
While these issues continue to get hashed out, here is a look at provisions likely to remain largely intact—though possibly with some modifications—if the bill passes in the Senate.
A surcharge on wealthy taxpayers and trusts
After original proposals to raise tax rates on ordinary income and capital gains were sunk by centrist Democrats, a compromise has gelled for a 5% surcharge on modified adjusted gross income of over $10 million, and an additional 3% surcharge—for a total of 8%—on income of over $25 million. AGI includes wages, commissions, capital gains and dividends, and retirement-plan distributions, among other income.
The surtax would boost the effective top tax rate from 37% to 48.8% on ordinary income when the 3.8% Medicare tax, and 20% to 31.8% on capital-gains tax, is included.
For nongrantor trusts, the 5% would apply to income of more than $200,000 and an additional 3% to income of more than $500,000.
Apply the Medicare tax to pass-through income
Most businesses are not subject to corporate income tax: Instead, they are structured as pass-through entities—such as sole proprietorships, partnerships, limited liability companies, and S-Corps—which means their owners include their share of business profits on their personal returns and are taxed at their personal income tax rate. Owners of pass-through entities do not currently pay the 3.8% Medicare tax. But a provision in the bill would levy the tax on active income of more than $400,000. Active income includes salaries. Passive income, which is investment income, would not be subject to the tax.
Limit business-loss deductions
Currently, losses from pass-through businesses can be carried forward into future years indefinitely; the new law would limit losses to a one-year carry forward.
Tighten rules for large IRAs
Individuals with aggregated IRA assets of more than $10 million would have to begin taking required minimum contributions—regardless of their age—beginning in 2029. Currently, distributions are required after IRA owners turn 72, no matter the account size.
Rules for Roth IRA conversions would also change. Starting in 2032, singles with income of more than $400,000 a year and couples earning more than $450,000 would be prohibited from converting assets from an IRA to a Roth IRA.
Set a corporate-tax floor
A 15% minimum tax would be levied on corporations earning more than $1 billion in annual profits. Some 230 businesses would be affected by this provision, according to the Tax Foundation.
Tax foreign profits
While there is support among lawmakers for taxing foreign profits, it is unclear how a provision may shape up. The House bill proposes a new 15% tax on foreign profits, separate from the proposed 15% minimum corporate tax, but senators have been crafting their own provision, says Watson. “This will be an interesting area to watch.”
Apply a surcharge to stock buybacks
Any company that buys back its own stocks would face a 1% transactional charge.
Bulk up IRS muscle
Funding to strengthen IRS enforcement capabilities and crack down on tax dodgers would aim to close an estimated $400 billion tax gap, the difference between the amount owed and collected each year.
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