On 13 September 2021, the U.S. House Ways and Means Committee released draft legislation that proposes a series of tax increases, tax incentives, and tax credits for individuals and corporations. The draft legislation will undergo further changes as it passes through committee markup, and then again as it goes to a vote in the U.S. House and Senate.
A number of the proposals will have an impact on high-income individuals, including those individuals currently working abroad.
The current top marginal individual income tax rate is 37%. Under the draft legislation, the top marginal rate would increase to 39.6%. The table below compares the income level subject to the current top rate with the income level subject to the proposed top rate based on the Joint Committee on Taxation projection for calendar year 2022.
| Filing status | Current (37%) USD |
Proposed (39.6%) USD |
|---|---|---|
| Married Filing Jointly | 646,151 | 450,001 |
| Head of Household | 538,451 | 425,001 |
| Single | 538,476 | 400,001 |
| Married Filing Separately | 323,076 | 225,001 |
The proposal would be effective for taxable years beginning after 31 December 2021.
The maximum tax rate on long-term capital gains is currently 20%. The proposed legislation would increase the capital gains rate to 25% and would be effective for sales that occur on or after 13 September 2021. However, the provision does not apply to any sale or exchange of stock executed pursuant to a written binding contract which was in effect on September 12, 2021, and which is not later materially modified.
A surcharge is currently not imposed on high-income individuals. The proposal would impose a 3% surcharge on individuals with modified adjusted gross income greater than USD 5 million (USD 2.5 million for married individuals filing separately). The proposal would be effective for taxable years beginning after 31 December 2021.
Note: To arrive at modified adjusted gross income, the foreign earned income exclusion and foreign housing exclusion/deduction are required to be added back to adjusted gross income.
Currently, excess foreign tax credits can be carried back one year and carried forward ten years. The proposal would reduce the foreign tax credit carryforward period from ten years to five years and repeal the foreign tax credit carryback. The proposal would be effective for taxable years beginning after 31 December 2021.
For the 2021 tax year, the estate tax basic exclusion amount is USD 11.7 million. The proposal would accelerate the expiration of the temporary increase in the estate and gift tax exemption amount. For decedents dying and gifts made after 31 December 2021, the exemption equivalent amount would be USD 5 million (the estimated amount in 2022 would be USD 6.02 million, as indexed for inflation).
Under current law, annual contributions to retirement plans are not limited by the value of the retirement plans owned by a taxpayer. The proposed legislation would prohibit further contributions to a Roth or traditional IRA if the total value of an individual’s applicable retirement accounts exceeds USD 10 million at the end of the previous taxable year. The limitations apply to those individuals in the proposed 39.6% tax brackets (see table above) and would be effective for taxable years beginning after 31 December 2021.
Taxpayers who currently exceed existing Roth income limits can make nondeductible contributions to a traditional IRA, and shortly thereafter, convert the nondeductible contribution from the traditional IRA to a Roth IRA. This is known as a “back-door” Roth IRA strategy and the proposal seeks to eliminate this. The proposal would prohibit Roth conversions—from both traditional IRAs and employer-sponsored plans—for individuals with taxable income in the proposed 39.6% tax brackets (see table above). The provision would be effective for taxable years beginning after 31 December 2021, and applies to distributions, transfers, and contributions.
Amanda Harrell
aharrell@bdo.com
Thomas McGlynn
tmcglynn@bdo.com