H.R. 2621 — REAL AMERICA Act

This section establishes the short title of the act as the “Reward Each American’s Labor And Make Every Rich Individual Contribute Again Act” or the “REAL AMERICA Act” and specifies that amendments and repeals refer to provisions of the Internal Revenue Code of 1986.

This section establishes an above-the-line deduction equal to cash tips reported to employers pursuant to section 6053(a) (i.e., cash tips totaling $20 or more in a calendar month), available for taxable years beginning after December 31, 2025, and limited to taxpayers with modified adjusted gross income not exceeding $450,000 ($900,000 in the case of a joint return). (Thus, such tips are effectively excluded from taxable income for eligible tipped workers.) The Treasury Secretary must modify income tax withholding tables and procedures to account for the deduction.

This section terminates the inclusion of Social Security benefits in gross income under IRC §86 for taxable years beginning after December 31, 2025 (previously, up to 85% of benefits for individuals with provisional income above specified thresholds—$25,000/$32,000 for single/joint filers, rising to $34,000/$44,000 with additional adjustments). (As background, taxes on these benefits are transferred to Social Security trust funds and the Federal Hospital Insurance Trust Fund to reimburse them for benefit payments.) It also appropriates from general Treasury funds to those trust funds, plus Railroad Retirement Act funds, an amount equal to the reduction in such transfers for each fiscal year. (Thus, the funds are held harmless from lost revenue.)

This section establishes an above-the-line deduction under new IRC §225 for qualified overtime compensation (i.e., overtime pay required by FLSA §7 at 1.5 times the regular rate for hours worked over 40 in a workweek), unavailable if modified adjusted gross income exceeds $450,000 ($900,000 for joint returns). It requires reporting of such compensation on Form W-2, directs the Treasury Secretary to modify withholding tables and procedures accordingly, with provisions effective for taxable years beginning after December 31, 2025.

This section modifies the rules governing taxation of property transferred in connection with performance of services by providing that the fair market value of a partnership interest so transferred equals the amount the recipient partner would receive if the partnership sold all assets at fair market value and liquidated (reduced by liabilities). It deems the recipient to have elected under those rules to include the value in gross income in the year of transfer unless the recipient elects otherwise under similar rules. The amendments apply to partnership interests transferred after the date of enactment.

This section adds new IRC §710 to establish special tax rules for an investment services partnership interest (ISPI), generally recharacterizing the partner's distributive share of the partnership's net capital gain as ordinary income and net capital loss as an ordinary loss (limited to the excess of prior recharacterized gains over prior recharacterized losses for that interest). It further (1) allocates recharacterized amounts ratably among relevant long-term and short-term capital gains and losses; (2) excludes dividends allocable to an ISPI from qualified dividend income treatment under IRC §1(h); and (3) disallows the IRC §1202 exclusion for gain from qualified small business stock allocable to an ISPI. The section also provides disposition rules for an ISPI, under which (1) any gain is ordinary income and recognized notwithstanding other Code provisions (with exceptions for gifts or death, including income-in-respect-of-a-decedent treatment under IRC §691); (2) any loss is an ordinary loss to the extent of prior net recharacterized gains for that interest; (3) contributions to a partnership may qualify for nonrecognition via irrevocable election and reporting; and (4) distributions of property trigger ordinary gain recognition to the recipient partner equal to the excess of fair market value over adjusted basis. (As background, these rules target preferential capital gains treatment for partnership interests received in exchange for investment management services, known as carried interests.)