[On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives.]
Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2021
- Increase to Allowable State and Local Tax Deduction (§137601): Currently, up to $10,000 may be deducted for state and local taxes. If passed, the new limitation would be $72,500 ($36,250 for married filed separately, trusts, and estates). This would be effective through 2031.
- Limitation on Excess Business Losses of Noncorporate Taxpayers (§138202): The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided relief for taxpayers by eliminating the excess business loss limitation (which disallows excess business loss for noncorporate taxpayers for losses in excess of $500,000 for joint filers and $250,000 for individuals) for the 2018, 2019, and 2020 tax years. This proposal would permanently disallow excess business losses for non-corporate taxpayers and would allow taxpayers whose losses are disallowed to carry those losses forward to the next succeeding tax year as a deduction.
Potential Corporate Tax Impact: Effective – Introduction Date (September 13, 2021)
- Modification to Rules Governing the Sale or Exchange of Qualified Small Business Stock (§138149). Currently, a taxpayer (other than a corporation) who acquired (or acquires) Qualified Small Business Stock (“QSBS”) during certain periods in 2010, and thereafter, and has held the stock for more than 5 years, is able to exclude 100% of any gain from the sale or exchange of QSBS from his or her gross income. Under the proposal, if the taxpayer’s Adjusted Gross Income (“AGI”) equals or exceeds $400,000, or if the taxpayer is a trust or estate, then the 100% exclusion of any gain from the sale of a QSBS is reduced to 50%.
Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2022
- Modification to Treatment of Certain Losses (§138142): Under the proposed legislation, losses realized on certain securities will be treated as being realized on the day that the event establishing worthlessness occurred, rather than on the last day of the taxable year. This potentially limits the instances when such a loss would be treated as a capital loss as opposed to a short-term loss (ordinary loss). Also, under the proposed legislation, partnership indebtedness would be treated the same as corporate indebtedness for the purpose of Section 165 of the Internal Revenue Code (IRC) and worthless partnership interests would be treated as a loss from the sale or exchange of a partnership interest at the time of the identifiable event establishing worthlessness.
- Wash Sale Rules Apply to Related Parties and Digital Assets (§138152): Currently, the Wash Sale Rule provides that a tax loss resulting from the sale of a security is not deductible to the extent the taxpayer acquires a substantially identical security at either 30 days before or 30 days after the loss. The proposed legislation would include digital currencies such as cryptocurrency in the Wash Sale Rule. Also, under the new legislation, related parties whose acquisition of a substantially identical security within 30 days would also implicate the wash sale rules.
- Net Investment Income Tax Expanded (§138201): Under current law, a 3.8% tax is imposed on Net Investment Income (NII) on certain individuals, estates, or trusts if a trade or business is a passive activity for the taxpayer (i.e., the taxpayer does not materially participate in the trade or business). In other words, the 3.8% tax does not apply to income from a trade or business conducted as a sole proprietor, partnership, or S Corporation, if the taxpayer materially participates in the trade or business. Under the proposal, the 3.8% tax would be imposed on the NII of high-income individuals (taxpayers with greater than $400,000 in modified adjusted gross income (single filer) or $500,000 (joint filer)) regardless of whether the trade or business is a passive activity for the taxpayer so long as the income isn’t already subject to the Federal Insurance Contribution Act (FICA) or Self-Employment Tax. Additionally, the current tax is 3.8% of the lesser of NII or the excess of modified Adjusted Gross Income (AGI) over a set dollar amount. For trusts and estates, the current tax is 3.8% of the less of undistributed net income, or the excess of AGI over a set dollar amount. The drafted legislation also proposes to expand the definition of the NII subject to the tax by stating the 3.8% tax would apply to the greater of specified net income or NII. For trusts and estates, the 3.8% would apply to the lesser of (1) the greater the undistributed specified net income or undistributed NII; or (2) the excess AGI over the set dollar amount.
- High Income Surcharge Tax (§138203): This proposal would impose a surtax equal to 5% of a taxpayer’s modified adjusted gross income in excess of $10,000,000 ($20,000,000 if married, filing separately) and an additional 3% of a taxpayer’s modified adjusted gross income in excess of $25,000,000. For this purpose, the modified adjusted gross income would be defined as the adjusted gross income reduced by any allowed deductions. Any modified AGI of an estate or trust in excess of $200,000 would now be subject to a tax equal to 5%. In addition, any modified AGI of an estate or trust in excess of $500,000 would now be subject to a further tax equal to 3%.
- Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311): This proposal would prohibit after-tax IRA or employer plan contributions from being converted to Roth accounts for all taxpayers irrespective of income level.
- IRA Non-Compliance Statute of Limitations Extended (§138312): This legislation would extend the statute of limitations for IRA noncompliance related to valuation related misreporting and prohibited transactions from 3 years to 6 years. This would apply to taxes to which the current 3-year period ends after December 31, 2021.
- IRA Owners Treated as Disqualified Persons (§138313): The legislation proposes to further clarify that IRA owners (including individuals who inherit an IRA as beneficiary aft the IRAs owner’s death) are always disqualified persons for the purpose of applying the prohibited transaction rules.
- Holding DISC or FSC In IRA (§138503): An IRA holding an interest in a Domestic International Sales Corporation (DISC) or Foreign Sales Corporation (FSC) that receives commission or payment from any entity, stock, or interest owned by the individual for whose benefit the IRA is established, is a prohibited transaction.
Potential Tax Impact to Individual Taxpayer: Effective – Enactment Date (January 1, 2022)
- Constructive Sale Rules Apply to Digital Assets (§138150): The Constructive Sale Rule under IRC §1259 provides that when there is a constructive sale of an appreciated financial position the taxpayer shall recognize gain as if such position were transferred at fair market value on the date of the constructive sale. A constructive sale occurs when a taxpayer holds an appreciated financial position and enters into certain designated transactions that substantially reduce taxpayer’s downside risk (such as a short sale). This tax proposal expands the definition of an “appreciated financial position” to include digital assets such as cryptocurrency.
- Deductions for Attorneys Representing in Contingency Fee Cases (§138518): If passed, expenses made that would be repaid contingent on recovery or settlement would be included as Section 162 (ordinary business expenses) deductions.
Potential Corporate Tax Impact: Effective – January 1, 2023
- Corporate Alternative Minimum Tax (§138101): If passed, an alternative minimum tax of 15% would be imposed upon all income for corporations with an average income over $1 billion. Income is determined through an “adjusted financial statement.” This is a formal financial statement subject to certain rules but may generally be met with a form 10-K filed with the Securities and Exchange Commission.
Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2029
- Contribution Cap on Individual Retirement Plans of High-Income Taxpayers (§138301): The proposed legislation would prohibit new contributions to a Roth or traditional Individual Retirement Accounts (IRAs) if the total value of all of the taxpayer’s IRAs exceeds $10 million at the end of the prior tax year. However, rollover contributions shall not be treated as new contributions. This provision would only apply to individuals whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer).
- Increased Required Minimum Distributions for Excess Balances (§138302): This legislation would impose new required minimum distributions for taxpayers whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer) and whose combined IRAs (Roth, traditional, and defined contribution plan) exceed $10 million at the end of year. These individuals, regardless of their age, would be required to take a minimum distribution in the following year of an amount equal to 50% of the amount by which the aggregate accounts exceed $10 million. For taxpayers whose aggregate account balances exceed $20 million, the taxpayer will be required to draw the lesser of: (1) the amount needed to bring the aggregate balance down to $20 million; or (2) the aggregate balances in all Roth IRAs and designated Roth accounts.
Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2032
- Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311):
This proposed legislation would eliminate the “backdoor” conversions of traditional IRAs or employer plan accounts to Roth IRAs for a taxpayer whose adjusted taxable income exceeds $400,000.