On November 19 the House passed the Build Back Better bill that includes many tax changes by a vote of 220 to 213. The legislation still faces hurdles in the Senate, where it's unclear whether moderate Senators Joe Manchin and Kyrsten Sinema will agree to some of the provisions included by the House. The debate over President Biden's signature plan to expand the social safety net is not over yet. Let’s look at the major tax proposals.
Individual Income Taxes
- Raise the cap on the state and local tax (SALT) deduction from $10,000 to $72,500 and extend this cap through 2030. The $72,500 SALT cap amount would also apply to the 2021 tax year. For 2031, the SALT deduction cap would be set at $10,000. The Senate is likely to water down the SALT deduction to those whose income is over $400,000.
- Create a new surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense, equal to 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million.
- Extend for one year the current expanded Child Tax Credit for more than 35 million American households, with monthly payments for households earning up to $150,000 per year and make refundability of the Child Tax Credit permanent.
- The Section 1202 gain exclusion on the sale of eligible C corporation stock owned for more than 5 years would not apply to taxpayers with over $400,000 for sales on 9/13/2021.
Pass-through Business Taxes
- Subject passthrough income from S corporations, LLCs and partnerships to the 3.8% Medicare tax whether they participate or not for single persons with income over $400,000 and over $500,000 for joint filers.
- Make permanent the active pass-through loss limitation enacted in the 2017 Tax Cuts and Jobs Act (TCJA).
- No retirement plan and IRA rules to eliminate backdoor Roth conversions and limit those who can make Roth IRA conversions or the limitation on what an IRA can own and accelerated RMDs for IRAs over $10 million.
- IRA contributions AFTER 2028 would not be allowed if an individual has over $10 million in an IRA and other retirement plan and their AGI is over:
- Single filer $400,000
- Married filing joint $450,000
- Head of Household $425,000
- Married filing separate $400,000
- Eliminate all back door IRA contributions effective after 12/31/2021
- Taxable Roth conversions would be disallowed for those whose income is over the above thresholds AFTER 12/31/2031
- RMDs would be 50% of the balance above $10 million using the above income thresholds and 100% of the amount over $20 million
Corporate and International Taxes
- Impose a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022.
- Create a 1 percent excise tax on the value of stock repurchases during the taxable year, net of new issuances of stock, effective for repurchases after December 31, 2021. Excluded from the tax are stock contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs).
- Change the Global Intangible Low-Taxed Income (GILTI) regime, effective for tax years beginning after December 31, 2022, including:
- Reduce the deduction for GILTI to5 percent, resulting in a tax rate of 15 percent
- Calculate GILTI on a country-by-country basis
- Reduce the deduction for Qualified Business Asset Investment (QBAI) to 5 percent
- Reduce the foreign tax credit (FTC) haircut to 5 percent and allow FTCs to be carried forward for 5 to 10 years and disallow FTC carrybacks
- Exempt GILTI from expense allocation rules
What’s Not Included
- No individual income tax rate increases.
- No capital gain rate increases.
- No corporate tax rate increase.
- No gift or estate tax provisions meaning the $11.7 million gift and estate tax exemption is not proposed to be cut in half in 2022 and no proposals to cause grantor trusts (such as Spousal Limited Access Trusts (SLATs, ILITs, GRATs, IDGT, QPRTs) to be subject to estate tax and no change to valuation discounts.
- No change to the 20% qualified business income deduction.
- No new tax on billionaires’ unrealized capital gains and a plan to require banks to report annual account flows to the Internal Revenue Service.