The House Committee of Ways and Means (the “House”) has been busy the last few days. Indeed, the House continues to mark up and work through potential revenue raisers (i.e., tax increases) to help pay for recent legislative proposals. Although these proposals are not yet law, tax professionals should keep a careful eye on the proposals to ensure that they do not potentially interfere with their client’s tax planning. At a very minimum, tax professionals should be knowledgeable enough to discuss the proposals with their clients and how such proposals (if eventually enacted into law) would impact their clients’ overall goals and objectives.
Income Tax Rates.
Increasing income tax rates is generally the easiest way to raise additional revenue for the government. And, the proposals are no different in proposing additional income tax increases. These potential increases are discussed below.
Individual Income Tax Rates.
Individual income tax rates are currently housed in section 1 of the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97 (the “TCJA”) reduced income tax rates for individuals. Under the TCJA, the top income tax rates for tax years 2018 through 2025 were reduced from 39.6 percent to 37 percent. However, the reduced rates were not permanent and were set to sunset in 2026, i.e., the top rates were set to revert back to 39.6%.
The House proposal seeks to increase these reduced rates from 37 percent to 39.6 percent for the 2022 and later tax years. In addition, the proposal seeks to bring more high-income earners into the higher marginal tax rate of 39.6 percent through a reduction of income subject to the higher rate. For example, under existing law, taxable income of over $538,475 for a single individual is taxed at 37 percent. Under the proposal, taxable income over $501,250 would be taxed at 39.6 percent for a single individual.
Corporate Income Tax Rates.