What You Need to Know
- The item in the revamped tax plan likely to increase an individual's current tax rate the most is the inclusion of S corp profits as investment income for high-income taxpayers.
- Most Americans will not be affected much by any of the changes.
- Levine predicts that the SALT deduction cap will be addressed in the bill before it's finalized.
Among the many details included and not included in President Joe Biden’s revamped tax plan announced Thursday are 10 items in particular that advisors, their clients and taxpayers in general may want to pay particular attention to, according to Jeffrey Levine, Buckingham Wealth Partners director of advanced planning and Kitces.com director of advisor education.
Although there are many tax changes proposed in the updated version of the bill, there are “far fewer than I’d have guessed a few weeks ago,” Levine said, kicking off a a long Twitter thread Thursday night.
As expected, Biden’s framework proposes raising the top marginal individual income tax rate to 39.6% for high-income taxpayers.
“This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500,” according to an 18-page breakdown of the revamped proposal by the House Ways and Means Committee.
The framework, which also increases the top capital gains rate to 25%, was “a year in the making but seems we now have what’s likely the final bill text,” Levine said.
But he predicted in the thread that at least one more change may happen before it’s voted on, saying one “BIG notable NOT in the bill is SALT relief.” He was referring to the state and local tax deduction cap that was included in the sweeping tax overhaul of 2017.
Several Democrats in Congress have been trying to get the cap repealed because it hits homeowners in New York and other blue states.
Levine guessed that Democrats were likely “still deciding between” a temporary full repeal or a permanent “higher-than-now cap.”
Therefore, it probably “makes sense to hold off making Q4 state tax estimates or property taxes that can be paid in Q1 2022,” he said.
Here are the top 10 new tax-related changes in the $1.75 trillion tax and spending plan that Levine pointed to in his Twitter thread (not including retirement-related ones):
1. The inclusion of S corporation profits as investment income for high-income taxpayers.
This is “the single item likely to increase an individual’s current tax rate the most,” according to Levine.
He pointed to Sec. 138203, Application of Net Investment Income Tax to Trade or Business Income of Certain High Income Individuals, tweeting: “This could make S corps a LOT less attractive for many higher earners.”
The provision in question “amends section 1411 to expand the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates,” according to the House Ways and Means Committee.
Although Levine said he heard many people talking about how this is going to impact partners and sole proprietors with high income, he tweeted: “In general, it won’t. This is about ‘picking up’ income that currently escapes both employment taxes and the NIIT.”