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Democrats rejected a series of proposals to raise the tax on the wealthy in their $ 1.75 trillion social and climate spending. But these taxes are set to rise even if legislators do not touch them.
From 2026 onwards, the marginal income tax rate paid by the highest earners will increase (to 39.6% from 37%), more multimillion-dollar properties will be subject to federal tax, and many entrepreneurs would lose a 20% tax deduction on their business income.
This is due to language use in the 2017 Tax Act, passed by a Republican-controlled Congress and the White House, which made these tax breaks temporary.
“Most of the individual provisions in [law] expires by the end of 2025, “said Garrett Watson, a senior policy analyst at the Tax Foundation.” Like [many households] experienced a tax cut in 2018, they may see a tax increase over the current policy in 2026. “
In September, the House Democrats proposed repealing changes to the highest income tax rate, property tax and tax deductions for wealthy business owners.
The measures, which were part of a social and climate package that was then estimated to cost up to $ 3.5 trillion, were aimed at raising money from households earning more than $ 400,000 a year and making the tax law more fair.
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However, an updated and slimmed-down framework issued Thursday by the White House did not require these tax measures. The framework was the result of months of negotiations between President Joe Biden and progressive and moderate Democrats.
Late. Kyrsten Sinema, D-Ariz., Had rejected many of the rate hikes the House Ways and Means Committee passed last month, prompting party officials to fight for other ways to pay for the plan. Republicans have also been reluctant to repeal the provisions of their 2017 tax law.
The tax measures may still change in ongoing negotiations. Legislators may also choose to extend the existing tax provisions before their expiration or make them permanent.
Income tax rates
Before the 2017 tax law, the highest earners paid a marginal income tax of 39.6%. (Individuals paid the rate for income above $ 426,700 and married couples for income above $ 480,050, according to the Tax Policy Center.)
The law reduced the top rate to 37%. (In 2021, this applies to single taxpayers with an income of more than $ 523,600 and to married couples with an income above $ 628,300.)
The top rate is planned to return to 39.6% in 2026. (However, the income threshold would be higher than under previous law to take inflation into account during the decade).
The Tax Act of 2017 reduced the number of estates covered by the estate tax, which is a tax on the transfer of property in the event of death.
Estates owe a 40% federal tax when the values exceed a certain amount. The tax law roughly doubled the threshold, which was $ 5.49 million per person in 2017.
(The amount that changes each year to account for inflation is $ 11.7 million per person and $ 23.4 million for married couples in 2021.)
The proportion of estates that pay the tax (about 0.2% per annum) is at the lowest percentage ever, dating back to 1934.
The threshold would drop to about $ 6 million by 2026 after taking inflation into account, Watson said.
The 2017 Tax Act allowed entrepreneurs who structure their business as a throughput (such as a partnership or sole proprietorship) to deduct up to 20% of their business income from taxes. (Such entrepreneurs pay business income tax at their individual tax rates.)
The measure was intended to offer gross parity with a tax cut for companies; the law reduced their tax rate to 21% from 35%.
The rules are complex and do not apply to all types of pass-throughs. Business owners would lose the tax relief in 2026.
The House Ways and Means Committee had proposed limiting the tax credit to business owners with an income below $ 400,000 (or $ 500,000 for married couples).