Newly Proposed Tax Changes and How IRC 1042 Just Became Everything for Business Owners

The Biden administration’s original tax proposal sought to raise the capital gains rate for people earning above $1 million from 20% to 39.6% in addition to the 3.8% surtax on investment income that pays for the Affordable Healthcare Act.  The proposed terms are dynamically changing, however, as Congress is now actively working on tax legislation.  

The House Ways and Means Committee (HWMC) recently proposed new counter legislation that would restore the top individual tax rate back to 39.6%, increase the capital gains tax rate for those with incomes above $400,000 from the current rate of 20% to 25%¹, and will include an additional 3% surtax² on taxable income of more than $5 million ($2.5 million for married filing separately and $100,000 for estates and trusts).  That means an 8% increase in capital gains tax for many business owners who sell their company, pushing the combined capital gains tax rate to 31.8% plus state tax as most capital gains are also subject to the additional 3.8% tax (net investment income tax).  The new proposal implies to us that significant negotiation is ongoing within Congress to gain consensus. 

This whitepaper explores the impact of the proposed tax changes in detail, including several scenarios of how the HWMC’s prosed tax changes would impact proceeds for a business owner selling their company; and how IRC 1042 just became everything.