Proposed Tax Changes – Build Back Better

On the White House webpage, the Build Back Better agenda is described as “…an ambitious plan to create jobs, cut taxes, and lower costs for working families—all paid for by making the tax code fairer and making the wealthiest and large corporations pay their fair share.” The initial draft of the Build Back Better bill is 2,465 pages and estimated to cost $3.5 trillion.

In August 2021, the US House of Representatives and US Senate passed this budget resolution and tasked the House Ways and Means Committee and Senate Finance Committee to identify ways to fund the bill.

Ways and Means released proposals in mid-September. These will change as Congress hammers out details, but lawmakers are considering:

  • 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.
  • Additional tax of high-income individuals: Impose 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).
  • 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.
  • QBI deduction: Limit the Qualified Business Income deduction by lowering the maximum allowable amount.
  • Net investment income tax: Expand the net investment income tax to taxpayers with greater than $400,000 in taxable 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).
  • 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.
  • 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.
  • Other proposals:
    • Fund the IRS to strengthen tax enforcement activities
    • Increase tax on certain tobacco products
    • Allow eligible S corporations to reorganize as partnerships without these reorganizations triggering tax

oPush 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.

While these are not likely to be the final provisions, changes in the tax code in the near future are likely. We will try to keep you apprised of these changes as they happen.

We are not offering general advice about preparing for these changes here because the provisions are so tentative. However, if you have a particular concern about your exposure, please contact us for individual assessment of moves you may consider in anticipation of the changes. In any event, come see us if you want to discuss strategies or do some tax planning with one of our top-tier professionals.

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.