The House of Representatives is advancing a tax plan that offers a mix of tax cuts and hikes for high-net-worth earners. The bill extends the 2017 tax cuts, including the lowered top rate of 37%, temporarily setting aside suggestions to increase the top rate for those earning over $2.5 million. The legislation also introduces new benefits for wealthy families, such as a permanent increase in the deduction for pass-through income from 20% to 23%.
This results in an effective top tax rate of approximately 28.5% for pass-through entities, compared to the top individual rate of 37%. Changes to state and local tax (SALT) deductions are part of the proposal, with the bill suggesting raising the SALT deduction cap from $10,000 to $30,000 for those with an adjusted gross income of $400,000 or less. For those earning above $400,000, the $30,000 cap decreases back to $10,000 progressively.
The House proposal also aims to increase the estate tax exemption to $15 million, indexed for inflation, providing clarity for estate planning.
House tax impacts high earners’ deductions
However, some advisors believe this change might decrease family gifting, particularly for clients with under $100 million in assets.
Despite the benefits, the House proposal includes an effective tax hike for high earners who itemize their deductions. A complex formula will reduce the benefits of itemized deductions, impacting charitable donations and mortgage interest deductions. Taxpayers in the top bracket will see a reduction in the value of each dollar deducted, effectively increasing their tax burden.
The House bill also includes a tax on the investments of private foundations, with rates varying based on the foundation’s asset size. This tax could reduce after-tax investment returns, lowering the funds available for charitable activities. In summary, while the House tax plan offers several benefits to high-net-worth individuals, it also introduces provisions that could limit some deductions and charitable contributions, potentially offsetting some of the advantages.