Build Back Better Act—3rd Time’s a Charm?
On Friday, November 19th, 2021, the U.S. House of Representatives narrowly passed the Build Back Better Act, sending the bill to the Senate where further revisions are expected. The latest version was modified considerably from two earlier incarnations, but it now appears to largely represent the framework for any final legislation (though enactment still remains less than certain).
Tax provisions at this point
The two focal points of negotiations were the price tag of the legislation, as well as the manner in which it would be “paid for” through tax increases. Most broad-based increases in the top income tax rate and corporate tax rate seem to have been abandoned after resistance in the Senate, although provisions relating to Roth conversions and so called “Mega IRAs” were revived in the latest version.
Individual and small business tax provisions (Effective starting in 2022):
5% surtax on annual incomes in excess of $10 million
Additional 3% surtax on annual incomes in excess of $25 million
5% and 3% surtaxes likewise apply to capital gains
Imposition of 3.8% net investment income tax (NIIT) on trade or business income that is not otherwise subject to Medicare taxes (for taxpayers with income above $400,000 single/$500,000 married filing joint).
Trust tax provisions (Effective starting in 2022)
The 5% and 3% income surtaxes apply to trusts at much lower income thresholds ($200,000 and $500,000 respectively).
Individual Retirement Account (IRA) provisions (Effective as noted):
Taxpayers with IRA balances in excess of $10 million, as well as income in excess of $400,000 single/$450,000 married filing jointly, will be precluded from making contributions to their IRAs starting in 2029.
Taxpayers with income above $400,000 single/$450,000 married filing jointly will have new (generally penalty free) required minimum distributions (RMDs) of half of any total account balances exceeding $10 million, as well as Roth balances to the extent that total IRA and qualified plan balances exceed $20 million, starting in 2029.
Taxpayers with income above $400,000 single/$450,000 married filing jointly will be precluded from converting IRAs and employer plan accounts to a Roth (starting in 2032).
All taxpayers regardless of income will be prevented from converting after tax IRA contributions to a Roth (so called “back door Roth” conversions) starting in 2022.
State and local income tax deduction (Effective tax years 2021 through 2030):
The current $10,000 cap on the deductibility of state and local income taxes (SALT deduction) would be increased to $80,000 (or $40,000 for an estate, trust or married individual filing separately). Effective starting this year, an increase in the deduction would make a welcome Christmas gift for taxpayers who itemize and reside in states with high state (and local) level taxes.
Corporate tax provisions (Effective as noted):
15% minimum corporate tax for certain large corporations (generally defined as those with financial statement income in excess of $1 billion) starting in 2023. 1% surcharge (based on fair market value) on corporate stock buybacks starting in 2022.
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Limits on the applicability of expanded Section 1202 gain exclusion for qualified small business stock (effective for sales after September 13th, 2021).
Absent from the legislation
Increase in the top marginal income tax rate to 39.6%.
Increase in the corporate tax rate.
Increase in the capital gains tax rate for high income earners (apart from noted surtaxes).
Limits to the Section 199A Qualified Business Income (QBI) deduction.
Reduction of the gift and estate tax exemption level.
Changes to the estate inclusion implications of grantor trusts and limits on valuation discounting in the transfer tax context.
Wealth tax on unrealized gains of billionaires and ultra-high-income individuals.
Prospects for enactment
Passage in the House was a major step for advancement of the legislation given its one-time linkage to the recently enacted $1.1 trillion Infrastructure Investment and Jobs Act.
And with the vote of every Democrat in the Senate required for passage given unified Republican opposition, the current spending level and scope of tax changes were tailored to meet the demands of key senators. The extremely busy legislative calendar for December, however, indicates that any final passage will be near year’s end, or possibly pushed to 2022 (if at all).
The national Defense Authorization Act (NDAA) and a debt ceiling increase are among must-pass pieces of legislation that are the current focus of Congress. Certain elements of the House bill, including immigration and drug pricing, are likely to be revised or removed due to the limits for passage under the reconciliation process as well. A delay of enactment to 2022 could likewise alter or delay the effective dates of any changes.
This material is for informational purposes only and includes a discussion of one or more taxrelated topics.
This tax related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material.
It is not intended (and cannot be used by any tax payer for the purpose of avoiding any IRS penalties that may be imposed upon the tax payer.
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