After months of negotiations between moderate and progressive Democrats, on November 2, 2021, Congress released the latest version of the Build Back Better Act for the $1.75 trillion social and climate spending bill. While not a final piece of legislation, the revised bill adds back some proposals omitted from the framework released on October 28, 2021, but still excludes a surprising number of proposals that were included in the original bill approved by the House Ways and Means Committee on September 15, 2021.
In order to help you proactively plan for potential tax law changes, it is important to stay informed on how these proposals may impact your personal situation and the goals you’re seeking to accomplish.
Below are some of the major proposals that are notably left out, remain intact, and new to the Build Back Better framework.
The below proposals are no longer included in the most recent framework:
- Capital Gains Rate Increase: Increase in top capital gains rates from 20% to 25%.
- Ordinary Income Tax Rate Increase: Increase in the top marginal ordinary income tax rates of individuals from 37% to 39.6%.
- Graduated Corporate Trust Rate Structure: Beginning at 18% on the first $400,000 of taxable income, 21% on additional taxable income up to $5 million, and 26.5% above $5 million.
- Accelerated Reduction of Gift and Estate Tax Exemption: Reduction of exemption to the pre-Tax Cuts and Jobs Act (TCJA) level of $5 million per person, indexed for inflation. The current exemption of $11.70 million per person ($12.06 million in 2022) is still set to expire on December 31, 2025.
- Limitations on use of Grantor Trusts: Eliminate benefit of creating a new or funding a pre-existing Grantor Trust; specifically, utilization of Insurance Trusts and GRATs as effective estate planning tools.
- Valuation Discount Limitation: Removal of valuation discounts applied to the transfer of passive assets such as minority interests in family investment partnerships.
- Limitation on the Section 199A deduction allowed.
These proposals were included in the original framework and are still present in the latest version:
- Reduction in Qualified Small Business Stock (QSBS) Benefits: Under current law, owners of QSBS may exclude gains from any sale or exchange equal to the greater of $10 million or 10 times the investor’s tax basis if held for at least five years. Individuals with adjusted gross income (AGI) above $400,000 would be limited to 50% gain exclusion (rather than 100%).
- Expansion of Net Investment Income Tax (NIIT) on Business Profits: Under current law, the 3.8% Net Investment Income Tax (NIIT) or Medicare surtax generally applies to passive income above certain thresholds such as capital gains, dividends, and interest. This proposal broadens the 3.8% NIIT to include all ordinary trade or business income for individuals with more than $400,000 in taxable income ($500,000 for joint filers). The NIIT would also apply to all undistributed business income of trusts and estates, unless paid out to the beneficiaries. This proposal does not apply to wages on which Social Security and Medical payroll taxes are already imposed, but materially impacts owners of limited partnerships or S corporations who were not previously subject to the tax on distributions.
- Continue Limitation on Excess Business Losses: This proposal would apply permanent limitation on the use of excess business losses at the partner or shareholder level rather than at the entity level.
- Constructive and Wash Sale Rules to Digital Assets: Application of constructive and wash sale rules to digital assets, including cryptocurrency.
- Mega IRA Limitations: Additional requirements that would limit the ability of individuals with modified adjusted gross income (MAGI) over $400,000 ($450,000 for joint filers) to contribute to retirement accounts valued over $10 million, require more rapid distributions, eliminate backdoor Roth IRA contributions and Roth conversions.
These proposals were not included in the original legislation but have since been added in the place of those removed:
- Corporate and International Taxes: Impose a 15% minimum tax on the profits that large corporations, those with over $1 billion in profits, report to shareholders. Create 1% excise tax on corporate stock buybacks. Excluded from the tax are stock contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs). Adopt a 15% country-by-country minimum tax on foreign profits of U.S. corporations.
- New Millionaire and Billionaire Surtax: A new 5.0% tax on individuals with modified adjusted gross income (MAGI) above $10 million, and an additional 3.0% tax on MAGI above $25 million. Separately, taxed trusts and estates would be subject to a 5.0% tax on MAGI above $200,000, and an additional 3.0% tax on MAGI above $500,000. The tax would only apply to the extent that income above the threshold is not distributed to beneficiaries.
- State and Local Tax (SALT) Deduction: Increase limitation on the deduction for state and local taxes (SALT) from $10,000 to $72,500 for single and joint filers, and from $5,000 to $36,250 for trusts and estates until January 1, 2032.
- IRS Enforcement: Invest in the IRS by hiring enforcement agents focused on pursuing wealthy Americans, modernizing outdated IRS technology, and investing in taxpayer services.
The Build Back Better Act tax legislative process continues to be fluid and the proposals may still be further revised. Continue to speak with your estate planning attorney, accountant, and the NewEdge Wealth team to determine the best course of action for you and your family. Our team will continue to monitor and update you on notable changes.
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