So many changes, formally announced and not, have been made since we last wrote about the Build Back Better Act, it’s been quite a task to keep track of them.
However, in view of the U.S. House of Representatives’ (House) having finally passed the Build Back Better Act on November 19, 2021, and with the bill now in Senate hands, we think it’s a good time to take a look at some of the latest provisions included in the legislation.
A number of the earlier proposed tax changes are not included in the current bill, as passed by the House; some provisions are altered, some retained entirely, and some new ones have been added.
Some Significant Proposals Not Included
- Increasing the corporate tax rate to 27% or 28%; the rate will remain at 21%.
- Increasing the tax rate on individuals in the top tax bracket to 39.6%. The top tax rate will remain at 37% through 2025, after which the individual income tax-related provisions of 2017’s Tax Cuts and Jobs Act (TCJA) will sunset.
- Raising the top tax rate on capital gains to 25%. The current rate, which currently has a maximum of 20%, will remain in place through 2025, at which point this rate, like other TCJA changes pertaining to individual income, will sunset.
- Reductions to gift and estate tax exemptions. The increase enacted via the TCJA will sunset at the end of 2025, but until then will remain at current levels ($11.7 million for single filers, $23.4 million for married joint filers, for 2021), indexed for inflation. After that, the exemption will revert to its previous $5 million, adjusted for inflation.
Some Significant Proposals Added, Retained, or Modified
- Net Investment Tax (NIT) of 3.8% on active business income for single-filers whose adjusted gross income (AGI) exceeds $250,000, and married joint filers with AGI over $500,000.
- Tax surcharge of 5% on high-income individuals, estates, and trusts. Those individuals and estate and trust entities with modified adjusted gross income (MAGI) of over $10 million would be subject to this surcharge, while those with MAGI above $25 million would incur an additional 3% surcharge.
- Increase to the cap on the deductibility of state and local taxes (SALT) from $10,000 to $80,000. The $10,000 limitation (covering single filers, heads of households, and married couples filing jointly), enacted per the TCJA, would have expired at the end of 2025; the proposed increase would cease as of January 1, 2031, and the cap would revert to $10,000.
- Elimination of eligibility for Roth IRA conversions for single filers or married separate filers whose taxable income exceeds $400,000, marred joint filers with taxable income above $450,000, and heads of household whose taxable income is above $425,000.
- Prohibition on further contributions to existing Roth or traditional IRAs for taxpayers with income as outlined above.
- Alternative minimum tax for corporations. This provision would institute a 15% minimum tax on adjusted financial statement book income for businesses whose three-year average for such income is over $1 billion.
- A 1% excise tax on the value of repurchases of corporate stock by publicly traded corporations.
- Capitalization of R&D expenses. However, this provision, originally proposed to be effective as of January 1, 2022, would now become effective January 1, 2026.
- Excess Business Loss (EBL) Limitation. This provision pertaining to EBLs for S-Corporations and partnerships (and calculated at partner or shareholder level) was initially part of the TCJA, and slated to take effect as of January 1, 2018. However, the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act delayed implementation retroactively to January 1, 2021. The current Build Back Better proposal would make this limitation permanent. Under the current provision, a new loss carryforward would be created, though EBLs cannot be treated as net operating losses (NOLs).
Obviously, in a bill this sweeping, the above are only a few salient provisions among the many included in the House-passed Build Back Better legislation. In addition, should the Senate make any changes to the text of the bill, it will have to be sent back to the House for reconsideration.
I recommend strongly that you consult with us before making any tax or financial decisions. Getting the right decision implemented effectively is far better than getting something done immediately, which may in hindsight prove to have been a less than optimal choice.
If you have any questions as to how the current Build Back Better legislation could impact your financial situation and plans, we are here for you.
Please click here to let me know how I can help you.
Until next time –