Opinion: Congress determining fate for year-end tax planning

SBJ file

Erica Smith

It’s shaping up to be a very busy fall season for Congress as the Biden administration works to pass a budget that includes many programs from his campaign platform. While congressional committees are working to write the legislative text for the budget reconciliation bill, the business community waits for the answer to the ever-important question: “How does this affect my taxes?”

President Joe Biden’s budget is primarily made up of two parts: the American Jobs Plan and the American Families Plan. The jobs plan includes revenue proposals that reform corporate taxation, support housing and infrastructure, and prioritize clean energy. The families plan consists of revenue proposals that strengthen the taxation of high-income taxpayers, expand tax credits for low- and middle-income taxpayers, and invest in improved taxpayer compliance and services.

At the core of the American Jobs Plan, the president proposes to raise the corporate income tax rate to 28% from 21%, effective for taxable years beginning after Dec. 31. However, the House of Representatives’ Ways and Means Committee has instead proposed a graduated rate structure with an 18% rate on the first $400,000 of a corporation’s income, 21% on income up to $5 million and a top rate of 26.5% on income exceeding $5 million. The other corporate tax proposals in the plan center on international tax policy changes.

The American Jobs Plan also would create the Neighborhood Homes Investment Act, a proposed tax credit worth $20 billion over five years. The NHIA would support new construction for sale, substantial rehabilitation for sale, and substantial rehabilitation for existing homeowners of single-family homes, condominiums or residences in a housing cooperative.

The second revenue proposal, the American Families Plan, aims to increase taxation of high-income taxpayers, close tax loopholes, and improve tax compliance and administration. This proposal would increase the highest marginal income tax rate to 39.6% from 37%. The House Ways and Means Committee has proposed that the 39.6% rate apply to taxable incomes of $400,000 for single filers ($450,000 for married couples). In addition, House Democrats have proposed a new 3% surtax on individuals with income exceeding $5 million.

Biden’s original proposal would increase the long-term capital gains and qualified dividends rate to 39.6% from 20% for taxpayers with adjusted gross income higher than $1 million. However, Democrats in Congress have instead proposed to increase the top capital gains rate to 25%.

The president also has proposed to remove estate tax planning tools like carryover basis at date of gift and step up in basis at date of death. Instead, the House Democrats propose to cut in half the estate and gift tax lifetime exemption from the current inflation-adjusted $10 million per person ($11.7 million in 2021) to an inflation-adjusted $5 million, among other changes to how estates and trusts are taxed.

The Biden administration aims to close what it believes to be tax loopholes related to various business structures including taxing carried interests at ordinary tax rates and ending tax-deferred real estate exchanges under Internal Revenue Code Section 1031.

So, what’s next? Budget reconciliation negotiations have hit a few obstacles, primarily over figuring out how to pay for the Democrats’ $3.5 trillion spending proposal, but the House is still aiming to pass a bipartisan infrastructure bill and the budget reconciliation package by the end of September.

The budget reconciliation bill would need the support of all 50 Democratic senators and almost all the House Democrats to be enacted without the support of congressional Republicans. However, moderate House Democrats are saying they won’t help advance the $3.5 trillion budget blueprint until the infrastructure bill is signed into law.

Sen. Joe Manchin [D-West Virginia] wrote an op-ed in the Wall Street Journal calling for a “strategic pause” on the budget reconciliation proposal due to concerns over rising inflation and a mounting national debt.

While there is much that is uncertain at this time and certainly much more to come, there is one area that appears clear: It will be both a dynamic and busy fall in Washington, D.C.

Consult with your tax adviser often for updates to your year-end and long-term tax planning.

Erica Smith is a partner with Springfield-based accounting firm BKD LLP. She can be reached at esmith@bkd.com.