Major Tax Changes On The Horizon 

Now that the COVID relief bill, the American Rescue Plan Act of 2021, has passed and is now being implemented, the focus in Congress and the Biden Administration will be moving to their next major bill as part of President Biden's Build Back Better plan. While some may wish this next bill to move quickly, the bill's complexity mostly likely means a longer process over the next six months.

Ideas for the new bill are centering around investments in infrastructure, including transportation, water, broadband and green energy. However, in order to pay for these investments, fundamental changes to the way individuals, company and investments are taxed will also be included. In 2017, Congress passed, and President Trump signed into law the Tax Cut and Jobs Act (TCJA), which changed the tax regime on all these areas. Now that President Biden and his party have similar control in Congress today, significant changes are expected in these areas as they put their own stamp on the tax code. While some changes may be a simple repeal of sections of the TCJA, others may be completely new tax structures.

Financial Transaction Tax

One proposal being considered that is favored by many progressives in Congress, including House Financial Services Committee Chairman Maxine Waters, is a flat tax on all financial transactions in the U.S. The Congressional Budget Office in 2018 estimated that a 0.1% tax on stock, bonds, and derivatives transactions would raise nearly $800 billion in federal revenue over a decade.

Investment Tax Changes

The new Chairman of the Senate Finance Committee, Rob Wyden of Oregon, has been very vocal about his desire to ensure the tax code "works for all Americans." Part of his idea centers around a proposal to dramatically change the way investments are taxed. In 2019, Senator Wyden introduced legislation that, among other items, would:

  • Tax capital gains income at the same rates as wage income;
  • Require tax to be paid each year on gains from tradable assets like stocks; and
  • Minimize the benefit of deferring tax on gains from the sale or transfer of non-tradeable assets like real estate investment.

It is not determined how close the Senator will follow his previous legislation in drafting a comprehensive bill this year.

Corporate Rate Increases

The TCJA law in 2017 reduced the federal corporate tax rate from 35% to 21%. President Biden and Congressional leaders have floated an increase in this rate to pay for some of the new spending priorities. While no new rate target has been officially announced, many have mentioned increasing the rate in the range from 25% to 28%. Additionally, other corporate items may be targeted, such as the phase-out of the qualified business income deduction.

Wealth Taxes

A host of other potential taxes targeted at high-income earners has been discussed by Senator Elizabeth Warren of Massachusetts, who recently was added to the U.S. Senate's tax-writing committee this year. Proposals that she has favored include:

  • Applying all the payroll taxes to annual incomes more than $400,000;
  • Capping itemized deductions; and
  • Lowering the thresholds for the federal inheritance tax and gift taxes.

When it comes to significant tax legislation, nothing is off the table for consideration by this new Congress. While legislation has yet to be introduced, President Biden and Congress are beginning to work on their ideas. Regardless of your organization's size, you should reach out to Dykema's tax and government policy advisors to discuss how potential tax changes may impact your company and to develop strategies to impact the upcoming process in Congress.

If you have any questions about the information from this alert, please contact Jim BrandellMike CummingRich LiebermanScott KocienskiAsel Lindsey or your Dykema relationship attorney.

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