After ongoing negotiations with congressional leadership following the release of the initial proposed tax bill on September 13, 2021 and pressure from moderate Democrats, President Biden and the House Rules Committee released a revised version of the Build Back Better reconciliation legislation on October 28, 2021. As recently as the last couple of days, the House has made some further amendments to the bill including changes to the SALT deduction (see below). The following sets forth what has been removed from the original proposed legislation as well as those provisions that remain in the bill; however, its important to note that this proposal, which House leadership is attempting to vote on today, will still be subject to approval as well as changes by the Senate, should it pass through the House, and there remains some resistance from moderate Senate Democrats.
Tax Law Provisions Removed from Proposed Legislation:
- Increase in Top Individual Tax Rate: The original version of the Bill included an increase from the current 37% to 39.6%, but that increase has been eliminated and the highest rate would remain at 37%.
- Capital Gains Rate: There would be no increase, from 20% to 25%, to the top long-term capital gains rate as originally proposed, which also means that there would be no concern about retroactivity to periods in 2021 (previously retroactive to September 13th, 2021).
- Increase in Top Corporate Tax Rate: The proposed increase of the corporate tax rate from 21% to 26.5% contained in the original legislation has been removed. Given that many clients may have converted or established C Corporations following the Tax Cuts & Jobs Act (TCJA), the retention of a 21% tax rate should allow many of those businesses to continue operating under such tax status.
- Estate/Gift/GST Tax Exemption: The revised bill will not include a reduction (originally proposed to drop to $5 million) of the current $11.7 million lifetime exemption available to individuals for estate and gift tax purposes. It should be noted, however, that this higher estate/gift tax exemption is still scheduled to sunset as of January 1, 2026 to $5.49 million (adjusted for inflation to around $6 million), so clients with estate and asset values exceeding this exemption amount should continue to engage in effective planning. Additionally, many states have a separate exemption that may be lower than the federal amount (Illinois exemption is $4 million).
- Grantor Trusts: The proposed changes to the grantor trust rules, which among other things could have caused taxable recognition of gains as well as taxable gifts have been removed from the legislation.
- Valuation Discounting: The provision in the previous bill that would have prohibited discounting of non-business assets (i.e. marketable securities) has been eliminated.
Notable Tax Law Changes Remaining in Revised House Bill:
- Tax Surcharge: The House bill as originally proposed includes a new surcharge beginning in 2022 for high income individuals, estates, and trusts. The surcharge is equal to 5% of modified adjusted gross income on income above certain thresholds. The legislation has now been amended to add an additional 3% surcharge (for a total of 8%) on a taxpayer’s modified adjusted gross income in excess of:These proposed changed would impact non-grantor trust structures as the surtax would apply on income at a significantly lower threshold.
- $500,000 for any trust or estate,
- $12.5 million for a married individual filing separately, and
- $25 million for every other taxpayer.
- Net Investment Income Tax: Starting in 2022, the initial House proposal would have extended the reach of the Net Investment Income Tax (NIIT) by expanding the types of income subject to NIIT to include income derived in the ordinary course of business where the taxpayer met certain taxable income thresholds. It would, however, not impose NIIT on income for which FICA (self-employment) tax is already imposed. The revised bill would further expand the definition of “net investment income” to include certain deemed foreign income items such as Subpart F inclusions, Mark-to-Market income, Qualified Electing Fund inclusions, and GILTI, when these items are includible as income for regular tax purposes.
- Retirement Accounts: The original proposals to limit contributions for high income taxpayers to certain retirement accounts in excess of $10 million and requiring distributions from accounts in excess of $10 million as well as other retirement account changes were initially removed from the legislation in the October 28th revised bill but have recently been added back in, presumably due to the need for more revenue provisions.
- Section 1202 Stock: As included in the initial bill, the special 75% and 100% exclusion rates will not apply to taxpayers with adjusted gross income equal to or greater than $400,000. In such cases, the taxpayer will still be eligible for a 50% exclusion of gain. The §1202 changes are proposed to be effective retroactively for any sales of §1202 shares after September 13, 2021.
- International Provisions/GILTI: Various changes to international tax provisions which affect both individuals and businesses remain in the bill. These include amendments to the global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) provisions. Included in such changes, to be effective for tax years beginning after December 31, 2022, which could impact the tax treatment of client investors owning shares in a foreign corporation are the following:
- The 50% and 37.5% deduction against GILTI and FDII income would be reduced to 28.5% and 24.8% respectively.
- The 20% haircut on foreign tax credits available to offset GILTI income would be reduced to 5%.
- GILTI income would be computed on a country-by-country basis and the exemption for a minimum return on investment would be reduced from 10% on tangible assets to 5%.
State Income Tax Deduction:
- In a last minute addition to the proposed legislation, the limitation on an individual’s deduction for state and local taxes (the SALT deduction), currently at $10,000, would be increased for tax years beginning after December 31, 2020 through 2031 to $72,500 for married filing joint returns ($36,250 for estates, trusts and married filing separate returns). It remains to be seen what the budget impact will be from such a proposal and how the legislation will compensate for the loss of such revenue.
The changes made to the proposed legislation remain very fluid as the political climate continues to evolve and as other spending provisions are considered and finalized, which would require revenue offsets. Given the recent state election developments, it remains to be seen whether moderate Democrats will gain even more influence, as they have exhibited already with Senators Sinema and Manchin, in negotiating a final budget reconciliation bill. If you have questions or wish to discuss any of these proposed changes and their potential impact on you, please contact your DUGGAN BERTSCH advisor for further information.