Proposed Tax Changes Under the Build Back Better Act

The House Ways and Means Committee recently released proposed tax provisions as part of the budget reconciliation bill a.k.a. the Build Back Better Act. The proposed changes would raise tax rates for corporations and individuals, along with other changes to the Internal Revenue Code. A draft of the bill in the House is the next step, and the Senate will also produce their own version. Differences between the two must be reconciled before reaching the President for signature. The proposed changes outlined here are subject to alteration or even complete removal in the upcoming weeks.

Individuals

Tax Rate: Top marginal rate increase from 37% to 39.6% for joint filers with taxable income over $450,000; heads of household over $425,000; unmarried individuals over $400,000; married individuals filing separate over $225,000; and to estates and trusts over $12,500.

High Income Surcharge: An additional 3% tax for taxpayers with modified AGI (MAGI) exceeding $5 million. MAGI, in this instance, means adjusted gross income reduced by allowable investment interest.

Capital Gains: Increase of the maximum capital gain rate to 25% for taxpayers with income of $400,000 (single), $425,000 (head of household), and $450,000 (joint filers).

Net Investment Income: 3.8% tax expanded to include Net Investment Income earned in the ordinary course of a trade or business for taxpayers with greater than $400,000 (single) and $500,000 (joint filers, trusts, and estates).

Qualified Business Income Deduction: Maximum allowable deduction under Section 199A of $500,000 for joint filers, $400,000 for single filers, $250,000 for married filing separate, and $10,000 for a trust or estate.

Retirement Plans

Contributions: Contributions to a ROTH or traditional IRA would be generally prohibited for accounts exceeding $10 million in value as of the end of the year. This would apply to single taxpayers with taxable income greater than $400,000, married taxpayers over $450,000, and heads of household over $425,000.

Required Minimum Distributions: For taxpayers described in the previous item, a minimum distribution from the account would be required in the following year.

ROTH Conversions: Proposal eliminates conversions for IRAs and employee sponsored plans for single taxpayers with taxable income above $400,000, joint filers over $450,000, and heads of household over $425,000.

Corporations and Businesses

Tax Rates: Return to a progressive rate structure with rates starting at 18% on the first $400,000 of income, 21% on income above $400,000 up to $5,000,000, and a top rate of 26.5% for corporate income exceeding $5 million. A 3% additional tax would be levied on income in excess of $10,000,000, with the maximum additional tax capped at $287,000.

Carried Interest: Increase the long-term holding period from 3 to 5 years to receive favorable capital gain treatment. The 3-year holding period would remain for real property trades or businesses and taxpayers with an AGI less than $400,000.

Sec. 1202 Stock: The 75% and 100% exclusion rates for gains realized on qualified small business stock would not apply to taxpayers with AGI equal to or exceeding $400,000. The baseline 50% exclusion would remain available to all taxpayers.

Estate and Gift

Unified Credit: Reversion of the unified credit against estate and gift taxes to $5 million per taxpayer, plus inflation.

Grantor Trust Rules: Assets in a grantor trust would be included in estate of grantor. The termination of a trust would result in a taxable gift. Sales between grantor and grantor trust will be taxed.

Additional information from the Tax Foundation can be found here

Reach out to Brendan at brendan@bmmscpa.com or Mollie at mollie@bmmscpa.com with any questions you may have.

Authored by: Jeff Sohn