Authored by Paul Dillon
There are two bills moving through Congress. The first is the $1.2 trillion bipartisan infrastructure bill, which has passed the Senate and contains only very modest tax changes (see our previous tax alert). It remains held up in the House, as some progressive congressional members are withholding support while they negotiate for a larger $3.5 trillion “human” infrastructure reconciliation package, officially known as the Build Back Better Act, to also be passed by the Senate. This has effectually linked the two bills, at least for the time being. The future of the bipartisan infrastructure bill likely depends on the success of the Build Back Better Act, which can only pass via the reconciliation process.
The tax components of the Build Back Better package cleared the Ways and Means Committee in September and await action on the House floor. It is increasingly looking like the Senate will not produce its own version of the bill, but rather negotiate the final package with the House and any changes (such as a state and local tax cap modification or limitations on estate “step-ups”) would be incorporated through amendments on the House floor before the final package is sent to the Senate for consideration.
The current Ways and Means bill, which includes a majority of President Biden’s priorities, is likely to be the initial framework of any successful legislation. Below are a few key provisions from the bill:
- Top ordinary income rate increase: Rate would bump up to 39.6% from 37%
- Top capital gains rate increase: Long-term capital gains and qualified dividends would be taxed at 25%, up from the current 20%; this would generally be effective for gains recognized after Sept. 13, 2021 (an exception applies to transactions that are under a binding contract but have yet to be executed)
- High-income surtax: A new 3% surtax would be imposed on individuals with modified adjusted gross income (MAGI) over $5 million ($2.5 million for married taxpayers filing separately) and trusts and estates with MAGI greater than $100,000
- Retirement account changes: Individuals with retirement account balances of $10 million or more, who meet certain income thresholds, would have to take required minimum distributions of 50% of the amount by which the account exceeds $10 million, regardless of age; additionally, high-income taxpayers would no longer be able to contribute to Roth IRAs via “back-door” contributions
Trust and estate provisions
- Gift and estate tax exemption reduced: The unified credit that rose to $10 million (indexed for inflation) under the TCJA and is set to expire at the end of 2025 would instead expire at the end of 2021; the unified credit would become $6.02 million (indexed for inflation) in 2022
- Grantor trusts included in estate: The transfer to a grantor trusts would no longer be an effective estate planning strategy; for post-2021 transfers, grantor trust assets would be placed into a decedent’s estate when the decedent was the deemed owner of the trust
- Top corporate tax rate increase: Rate would jump to 26.5% from 21% for taxable income over $5 million; a lower 18% rate would apply to taxable income of $400,000 and under, while the 21% rate would continue to apply to taxable income above $400,000 but not greater than $5 million; once a corporation reaches $10 million in income, the graduated rates disappear and all income would be taxed at 26.5%
- Qualified business income deduction limitation: The 20% qualified business income deduction under IRC section 199A would be limited to annual deductions of $500,000 for married filing joint returns and $400,000 for single and head-of-household filers
- Net investment income tax (NIIT) expansion: All trade or business income for taxpayers with taxable income over $400,000 ($500,000 for joint filers) would be subject to the NIIT, regardless of material participation, unless it is subject to self-employment tax
- Excess business loss limitation: The $500,000 current-year loss limitation for noncorporate taxpayers that was set to expire after 2025 would be made permanent, and it would treat any suspended losses as a deduction instead of a net operating loss, thereby subjecting it to testing and potential limitation in subsequent years
- Carried interest modification: In order to obtain capital gain treatment, carried interests would need to be held for five or more years, up from three years
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