UPDATE
The proposed Build Back Better Act has stalled in the Senate. There is currently no clear path on the future of the proposed bill. We will provide updates on any proposed tax legislation.
Please contact your trusted advisor at Reese Henry to discuss any tax planning questions.
On November 19, the House of Representatives passed the Build Back Better Act (“the Act”). The Act contains approximately $1.75 trillion in new spending and provides for a wide array of social programs that will be funded with several new taxes and investments to strengthen IRS enforcement.
The proposed House version of the Build Back Better Act is outlined below has not been enacted into law. This act may change significantly in the Senate or may not pass in any form during the 2021 legislative session.
Some of the key tax changes include:
A surcharge of up to 8% on individuals, trusts, and estates
Limiting excess business losses of noncorporate taxpayers
Limiting the qualified small business stock (QSBS) exclusion to 50% for most sales of QSBS after September 13, 2021
Expanding the Net Investment Income Tax of 3.8%
New restrictions on defined contribution retirement plans
Modifying the cap on the State and Local Tax (SALT) deduction from $10,000 to $80,000
Notably, a host of provisions that the Biden Administration and Democrats in Congress had proposed were not included in the Act, including rate increases on income taxes and capital gains, changes to the gift and estate lifetime exemption levels, and limiting the use of grantor trusts in popular estate planning strategies.
The Act now moves to the Senate, where its fate is unknown. With an evenly divided Senate, all Democrats in the Senate must vote for the Act for it pass through the budget reconciliation process.
We caution taxpayers from acting solely in response to the House Build Back Better Act, understanding the Senate may kill this legislation or may change the bill significantly from the House version.
Key tax provisions included In the Act
Surcharge on Individuals, Trusts, and Estates
Beginning with taxable years ending after 12/31/21.
5% Surcharge
Individuals with modified adjusted gross income (MAGI) exceeding $10M. Trust and estates with MAGI exceeding $200K.
3% Surcharge
Individuals with MAGI exceeding $25M. Trust and estates with MAGI exceeding $500K.
Limitation on Business Losses of Noncorporate Taxpayers
Retroactively effective after 12/31/20
Makes disallowance of excess business losses permanent
Business losses in excess of $250,000 for individuals ($500K for joint filers), adjusted for inflation.
Limitation on the Qualified Small Business Stock (QSBS) Exclusion
Applicable to sales and exchanges after September 13, 2021
75% and 100% exclusion rates for gains realized from QSBS are eliminated
Individuals with income of $400,000 or greater. Trust and estates (no income threshold)
50% exclusion for gains realized from QSBS
Applicable to all taxpayers
Net Investment Income Tax
Beginning with taxable years ending after 12/31/21
3.8% tax
Would now apply to trade or business income for individuals with MAGI exceeding $400K ($500K for joint filers). Trust and estates (regardless of income levels).
Defined Contribution Retirement Plan Restrictions
Limitations on Retirement Plan Contributions
Taxpayers with adjusted gross income (AGI) exceeding $400K ($450K married filing jointly) may not contribute to a defined contribution retirement plan account (other than a SEP/SIMPLE IRA) if the aggregate value of their accounts is $10M or more.
Limitations on Roth Conversions
Taxpayers with AGI exceeding $400,000 ($450,000 married filing jointly) are not permitted to make a Roth conversion (effective 1/1/2032). In addition, Roth conversions of defined contribution retirement plan funds are permitted only to the extent they are taxable (effective 1/1/22).
Mandatory Distributions from Retirement Accounts
Taxpayers who are not allowed to make otherwise eligible contributions will be subject to a minimum distribution of 50% of excess over $10M. These taxpayers will also be subject to distributions of 100% of excess over $20M, but only to the extent of Roth accounts.
Please contact your trusted advisor at Reese Henry to discuss any tax planning questions you have that may be impacted by these proposals.