December 6, 2022

Volume XII, Number 340


December 05, 2022

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UPDATE: Three Significant Takeaways from the Tax Cuts and Jobs Act

This update to our Tax Alert on Nov. 2nd describes additional key provisions in the “Tax Cuts and Jobs Act” (H.R. 1), released by the Chairman of the House Ways and Means Committee on Nov. 2nd, as well as the Chairman’s substitute of the tax bill released on Nov. 3rd.

45.6% Tax Bracket: First, the Bill contains a “bubble” tax that will result in high-income taxpayers paying a 45.6 percent tax rate on a portion of their taxable income above $1 million. Although all taxable income more than $1 million is subject to a 39.6 percent marginal tax rate, the Bill imposes an additional 6 percent tax on taxable income between $1 million and $1.2 million for individuals (and $1.2 million and about $1.64 million for joint filers). The purpose of this “bubble tax” is to eliminate the benefits these taxpayers received from the 12 percent tax rate that applies to the first $45,000 of income for individuals and $90,000 for joint filers. Taxable income above $1.2 million for individuals and about $1.64 million for joint filers would be taxed at 39.6 percent, with no surcharge. The result of the bubble tax could be additional tax of as much as $12,000 for individuals and $26,400 for joint filers.

Repeal of Section 409A: Second, the Bill repeals prior rules regarding nonqualified deferred compensation under Section 409A, which allowed employees to defer income tax on certain deferred compensation arrangements. Beginning in 2018, new section 409B provides that an individual would be taxed (both income and “FICA”) on compensation under a “nonqualified deferred compensation plan” as soon as there is no substantial risk of forfeiture regarding such compensation. In addition to traditional deferred compensation plans, section 409B would also apply to equity-based compensation arrangements, including stock units (phantom stock), stock options and stock appreciation rights. The Bill also narrows the definition of a substantial risk of forfeiture so that the forfeiture relates only to the future performance of services, rather than to a covenant not to compete or the occurrence of some condition. Other types of popular forfeiture conditions, such as the occurrence of an IPO, a change in control or economic performance conditions, would no longer qualify as a substantial risk of forfeiture for these purposes reporting and withholding requirements, along with income taxation, would apply when the substantial risk of forfeiture lapses. Generally, this occurs upon the “vesting” of the compensation.

Transition Period Until 2026: The Bill allows a transition period through 2025 for existing arrangements related to services performed by Dec. 31, 2017. Compensation for services performed before 2018 must be included in taxable income either in the year in which the compensation is no longer subject to a substantial risk of forfeiture (under the new definition) or in the taxpayer’s last tax year before 2026. The Bill also permits, subject to further guidance from the Treasury, a limited 120-day period to allow existing deferred compensation programs of all sorts to be amended without violating Section 409A.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume VII, Number 311

About this Author

William J. Sanders, Polsinelli PC, Limited Liability Company Matters Lawyer, Tax matters Attorney
Shareholder, Practice Chair

Through over 30 years of practicing law, Bill Sanders has developed broad tax experience in corporate, partnership, limited liability company, complex business transactions, and workout and bankruptcy issues.

As chairman of the firm’s tax practice group and a licensed CPA in Missouri, Bill’s clients range from Fortune 100 companies to family-owned and tax-exempt organizations.

He regularly represents clients nationwide before the Internal Revenue Service at all levels including audits, the Appeals Division and...

Jeffrey Goldman, Polsinelli Law Firm, Chicago, Tax Law Attorney

Jeffrey Goldman has a wealth of experience in taxation of business enterprises, including corporate and partnership taxation, state and local tax, international tax and tax controversy. He has more than 25 years of experience representing clients in complex tax matters.

Jeff frequently advises clients on structuring complex domestic international transactions; mergers and acquisitions; and financing transactions, restructurings, and reorganizations. He also handles complex tax controversies at audit, before the IRS Appeals Division and in court...

Julius W. Hobson, Jr., Polsinelli PC, Public Policy Attorney, Long Term Care Regulation Lawyer,
Senior Policy Adviser

Julius W. Hobson, Jr., strives to meet client public policy goals and objectives based upon the client needs and capabilities. Julius has more than 40 years’ experience in public policy, working both inside and outside of government. He has a deep-rooted understanding and compassion about the public policy process — both legislative and administrative. He primarily serves health care clients with particular emphasis on physicians, hospitals, home health, and long-term care providers. 

Henry Talavera, Polsinelli PC, Retirement Plan Implementation Lawyer, Employee Benefits Attorney

Henry Talavera’s experience representing clients before the IRS and U.S. Department of Labor, along with his prior experience as a federal government attorney, enables him to handle complex issues for clients.

Henry has a broad-based, comprehensive practice that involves all areas of employee benefits law related to benefit programs and arrangements for employees, directors, and independent contractors. His extensive experience includes guidance relating to public, private, and tax-exempt employers on the design, implementation, and...