House Democrats recently released their budget reconciliation proposal. The package pays for spending on healthcare, retirement, education, families, and initiatives to address climate change by increasing taxes on higher-income individuals and large businesses. The revenue provisions in the bill would generate $2.1 trillion over the next decade. While consistent with President Joe Biden’s proposals, the House bill is somewhat more modest. For instance, it makes more incremental changes to the international tax rules enacted by the Tax Cuts and Jobs Act of 2017 (TCJA) and does not include a provision to tax capital gains at death. In addition, the House bill does not include a provision to provide relief from the limit on the state and local tax deduction, though the committee released a statement saying the Democrats were committed to providing such relief.
Following are highlights of the provisions included in the proposed bill:
Corporate and international provisions
- Raise the top tax rate from 21% to 26.5% for corporations with income more than $5 million for tax years beginning after 2021.
- Revise the interest limitation rules under IRC Section 163, including adding a provision to limit the interest deduction for U.S. corporations that are members of certain large multinational groups filing consolidated financial statements for tax years beginning after 2021. The carryforward period for disallowed interest expense would be limited to five years.
- Reduce the IRC Section 250 deduction to 21.875% for foreign-derived intangible income (FDII) and 37.5% for global intangible low-taxed income (GILTI) for tax years beginning after 2021, with a transition rule for fiscal year filers. The effective rate increases from 13.125% to 20.7% on FDII and from 10.5% to 16.56% on GILTI.
- Revise the base erosion and anti-abuse tax to expand applicability for tax years beginning after 2021 and increase the tax rate from 10% to 12% in 2024 and to 15% in 2026.
- Enact changes to the foreign tax credit rules, which generally would be effective for tax years beginning after 2021, including implementing a country-by-country application of foreign tax rules, eliminating the foreign branch basket, and eliminating excess credit carrybacks while cutting the carryforward period in half.
Provisions affecting individuals, pass-throughs, and small businesses
- Raise the top individual income tax rate from 37% to 39.6% for tax years beginning after 2021. For 2022, the top rates start at more than $450,000 in income for married taxpayers filing jointly, more than $425,000 in income for heads of household, and more than $400,000 in income for single filers and married taxpayers filing separately.
- Impose an additional 3% tax on certain high-income taxpayers for tax years beginning after 2021. For instance, the additional tax would apply to married taxpayers filing jointly with more than $5 million in modified adjusted gross income.
- Raise the top capital gains rate to 25%. The change generally would apply to capital gains and losses recognized after Sept. 13, 2021.
- Expand the 3.8% net investment income tax (NIIT) to cover most trade or business income for tax years beginning after 2021. Also, increase the thresholds for determining when taxpayers are subject to NIIT (for instance, the threshold for married filing jointly is raised from $250,000 to $500,000).
- Make the limitation on excess business losses of noncorporate taxpayers permanent. The limitation is set to expire for tax years beginning after 2026.
- Limit the amount of the qualified business income deduction under Section 199A for certain high-income individuals for tax years beginning after 2021.
- Tighten the rules for when partnership profit interests (sometimes referred to as carried interests) held by investment fund managers are eligible for preferential long-term capital gain tax treatment for tax years beginning after 2021, including increasing the holding period from three years to five years with exceptions for taxpayers (other than estates) with adjusted gross income of less than $400,000 and for partnership interests attributable to a real property trade or business.
- Limit the Section 1202 exclusion to 50% for taxpayers with adjusted gross income of more than $400,000 for sales or exchanges after Sept. 13, 2021.
- Accelerate expiration of the higher estate and gift tax exemption enacted by the TCJA so the pre-TCJA amounts (adjusted for inflation) apply to decedents dying and gifts made after 2021. The original expiration date was Dec. 31, 2025.