The long-awaited budget reconciliation bill was unveiled this week, and there’s a lot to unpack for individual and corporate taxes. You’ll remember the bill is key to tax reform and how the government intends to pay for the 3.5 Trillion dollar stimulus package. While the bill is nowhere near becoming law, it’s 800 pages long and has notable additions and omissions from the tax ideas discussed so far.

The Bill was put forth by the House Ways and Means Committee, and most of it goes into effect in 2022. Most of the proposal focuses on the highest earners and the highest tax bracket:

Individual Taxes

The top marginal rate increases from 37% to 39.6%, as expected.

A 3% High Income Surcharge kicks in for incomes over $5 Million

Long-term Capital gains are currently 20%, but bumping up to 25% for high earners. This is lower than the “ordinary income” tax at 39.6% heavily marketed by Joe Biden.

 Corporate Taxes

Corporate taxes are currently a flat 21%, but. The new proposal is a sliding scale from 18-26.5%. This is lower than the widely anticipated 28-35% flat tax.

Pass-through corporations such as S corps will no longer be able to avoid the 3.8% medicare surtax as they can today.

The Section 199 20% Qualified Business Income deduction is shockingly still alive for businesses earning less than $500k.

Estate taxes

Estate taxes would revise downwards from $24 Million to $12 Million 4 years ahead of schedule.

 Retirement plans

Roth conversions would be disallowed for people in the top tax bracket, beginning in 2031. This gives people 10 years to convert their existing IRA accounts to Roth, which encourages a current tax windfall for the IRS.

The Mega-backdoor Roth would come to end- workplace retirement plans would be prohibited from allowing after-tax contributions and would end conversions to a Roth IRA. This applies to all income levels.

Anyone with IRA or retirement accounts in excess of $10 Million dollars has some planning to do
- contributions would be disallowed to IRA or Roth accounts

(Not sure why they’re worried about a $6,000 contribution to an IRA, but ok…)

-Required Minimum distributions would be required for 50% of the excess in a year where the balance exceeds $10 Million. That means the owner of an $11 Million IRA would be required to pull out $500,000 the following year.

Omissions

Notably absent are changes to capital gains upon death. While estate tax limits are being revised downwards, there’s no mention of changing the step-up in basis for inherited assets.

The State and Local Tax (SALT) deduction hasn’t changed in this proposal. It was widely expected that high-tax states would be able to deduct their full state taxes on their federal return again, but that remains unchanged at a $10,000 cap.

Retirement plan contributions are still deductible against income. There had been a push from the administration to give a 28% credit for contributions, which helped savers in low brackets but penalized those in high brackets.

The Billionaire tax made no appearance in the proposal, which instead focused on income tax revision vs wealth itself.