Proposed Tax Changes – Build Back Better

In our October newsletter we ran an article that outlined the proposed tax law changes related to the Build Back Better Act (BBB) released by House Ways and Means in mid-September. On October 28, 2021, the House Rules Committee released a revised version of the BBB. These changes still need to be voted on by the House before it is sent to the Senate, and further changes are anticipated as the bill is considered by the Senate. Following is a quick summary of what provisions are still in the BBB and what provisions are no longer there as of October 28, 2021.

The following provisions remain in the BBB:

  • Additional tax of high-income individuals: This provision originally proposed a surcharge on high-income individuals equal to 3 percent of the taxpayer’s modified adjusted gross income in excess of $5 million ($2.5 million for a married individual filing separately). The October 28th version keeps this provision with some changes. The revised proposal imposes a 5 percent tax on modified adjusted gross income in excess of $10 million ($5 million for taxpayers filing as single or married filing separately). An additional 3 percent tax would apply to modified adjusted gross income over $25 million ($12.5 million for single and married filing separate).
  • Net investment income tax: The provision to expand the net investment income tax to taxpayers with greater than $400,000 ($500,000 for married filing jointly) in taxable income remains in the October 28th version. For trusts that materially participate in a given business, the definition of net investment income would be expanded to include all such trade or business income.
  • Wash sale rule: The wash sale rule prevents taxpayers from claiming losses while retaining an interest in the loss asset. Currently applicable to stock and other securities, the proposal would expand the rule to include commodities, currencies, and digital assets (such as Bitcoin).
  • Push back the effective date of the code section that provides for amortization of the research and experimental expenses (a taxpayer-friendly change) to after December 31, 2025.

Provisions added to the October 28th version of the BBB

  • Surtax on non-grantor trusts: A 5 percent tax would apply to the adjusted gross income of a non-grantor trust in excess of $200,000. An additional 3 percent tax would apply to adjusted gross income of these trusts in excess of $500,000.
  • Corporate alternative minimum tax: The 2018 Tax Cuts and Jobs Act repealed the corporate AMT for all C corporations. The BBB would reinstate a modified AMT for corporations.

The following provisions are NOT in the October 28 version of BBB:

  • Corporate tax rates: Replace the flat 21 percent corporate income tax with a graduated structure.
    • 18 percent on first $400,000 of income
    • 21 percent on income up to $5 million
    • 26.5 percent on income thereafter
  • Individual income tax rates: Increase the top marginal individual income tax rate to 39.6 percent from 37 percent for tax years beginning after December 31, 2021.
  • Capital gains rates: Increase capital gains rates for certain high-income individuals from 20 percent to 25 percent. When combined with the 3.8 percent surtax on net investment income, the top long-term capital gains rates would be 28.8 percent. The increased rates would apply to single filers with taxable income over $400,000 and for married couples at $450,000.
  • Changes to grantor trust rules:  Taxpayers can currently use grantor trusts to push assets out of their estates while retaining close control of those assets. The proposal would return those assets to a decedent’s taxable estate.
  • Estate, gift, and generation-skipping transfer exemptions: The basis exclusion amount for transferred assets would reduce from the current $11.7 million to $5 million per taxpayer.
  • Allow eligible S corporations to reorganize as partnerships without these reorganizations triggering tax.
  • QBI deduction: Limit the Qualified Business Income deduction by lowering the maximum allowable amount.
  • Treat transfers of appreciated property on death as taxable events: Under current law, appreciated assets owned by a decedent are given a “step-up” in basis to the fair market value of the asset at the date of death. As a result, the increased value of the asset during the decedent’s life completely avoids federal income tax. The proposals would do away with the step-up and tax the gain on inherited assets. Transfers in gift would receive similar treatment.
  • IRA contribution limits: The new proposal would prohibit taxpayers from contributing to a Roth or traditional individual retirement account above $10 million in value.

Again, these are not likely to be the final provisions, but we find it interesting to follow the evolution of the BBB. In fact, a November 4 release introduced additional changes we have not had opportunity to study yet, and a House vote is anticipated on November 12, 2021. Stay tuned for next month’s updates!

About this Author

Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.