Democrats in Congress are considering reforms to the 20% tax deduction as part of a $ 3.5 trillion federal spending package.
The Democrats’ proposal would phase out tax breaks for business owners with taxable incomes greater than $ 400,000, according to a discussion list received from CNBC. It would also make the tax cut available to more people under the $ 400,000 threshold by lifting some of the existing restrictions.
A discussion list is a draft of ideas that lawmakers put together before formally presenting them to the House or Senate. The Democrats are weighing changes to the tax law to raise funds for up to $ 3.5 trillion in spending on climate, education, paid vacation, and other measures.
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Reforms to the pass-through deduction would, according to the list, “generate significant revenue while allowing a new tax cut for small business owners on Main Street.”
The deduction, also known as 199A, was created by Republican Tax Law of 2017, the signature achievement of President Donald Trump. It enables the owners of run-through businesses – such as sole proprietorships, partnerships, and suburban corporations – to write off 20% of their business income.
Most of the benefits go to wealthy taxpayers.
In 2018, about 53% of the value of $ 40 billion went to people with incomes above $ 500,000, according to the Joint Committee on Taxation, an impartial body under US Congress. By 2024, this share is expected to grow to 61% of a total of 60 billion US dollars.
While the Democrats’ discussion list contains few details, the pass-through policy changes it contains sound like concepts that Senate Finance Committee Chairman Ron Wyden, D-Ore., Incorporated into a recent bill.
Wyden’s legislation would phase out the 20% deduction for business owners whose taxable income exceeds $ 400,000 and completely eliminate the tax break once their income exceeds $ 500,000.
The Wyden sponsored bill would also expand eligibility for tax breaks.
Currently, certain service business owners – such as lawyers, doctors, veterinarians, and financial advisors – cannot get the full deduction if their income exceeds $ 164,900 (individual applicants) or $ 329,800 (married couples enrolling together) in 2021. You cannot get it at all if your income exceeds $ 214,900 (single) or $ 429,800 (married).
The pass-through deduction is expected to disappear after 2025, which means that all reforms would end after a few years without an extension. President Joe Biden did not propose any changes to the tax break in his annual budget.
Some business groups have argued that limiting or removing the deduction would harm small businesses and result in fewer jobs, lower wages and lower economic growth.
“Such changes would mean a direct tax hike for American employers on Main Street, a major reason why the tax plan published by the White House in March left the deduction completely intact,” said a joint letter from a trade coalition association published in June.