Not surprisingly in the current political climate, the late October 2021 version of the House of Representatives’ “Build Back Better Act” contained substantial changes from the original proposals released by the House Ways and Means Committee just a month earlier. On November 3, 2021, House Democrats released a “managers amendment” that would further modify the tax and other provisions in the “Build Back Better Act,” as released last week by the House Rules Committee in late October.
To fund the $1.75 trillion (reduced from $3.5 trillion) spending bill, a number of tax proposals were eliminated from the first version due to a lack of support from certain influential lawmakers. Some proposals from the original release remained and new proposals were added. The “managers amendment” also made additional changes to the tax provisions, including adding selected previously removed retirement plan provisions.
Though not a complete list, some of the notable inclusions and exclusions in the recent House versions, including the “managers amendment,” are as follows:
Items Included:
- Surcharge tax on high-income individuals, estates, and trusts – tax equal to 5% of a taxpayer’s modified adjusted gross income (MAGI) in excess of $10 million and an additional tax of 3% of a taxpayer’s MAGI in excess of $25 million beginning in tax years after December 31, 2021.
- Net Investment Income Tax (NIIT) – application of the additional 3.8% tax to encompass all pass-through income over $500,000 for joint filers, $400,000 for single filers, and $13,450 for estates and trusts in 2022, effective for tax years beginning after December 31, 2021.
- Gain exclusion on the sale of qualified small business stock limited to 50% for taxpayers with adjusted gross income (AGI) in excess of $400,000 and to all trusts and estates regardless of income level. Effective for sales after Sept. 13, 2021, with an exception for certain binding contracts.
- Corporate alternative minimum tax – 15% minimum tax on adjusted financial statement income for corporations with a three-year average of such income in excess of $1 billion.
- Contribution limit and increase in Minimum Required Distributions for Individual Retirement Plans of High-Income Taxpayers with large account balances – Additional contributions would be prohibited if they would cause the aggregate amount of Individual Retirement Plans as of the end of the prior year to exceed $10 million. If the combined accounts exceed $10 million, the minimum distribution generally is 50 percent of the amount by which the aggregate accounts at the end of the prior year exceeds the $10 million limit. There are additional requirements for aggregate accounts totaling $20 million. Effective for tax years beginning after December 31, 2028.
- Tax treatment of Rollovers to Roth IRAs and Accounts – So-called “back-door” Roth IRA conversions would be closed by prohibiting after-tax plan and IRA contributions from being converted to Roth IRAs regardless of income level. Effective for distributions, transfers, and contributions made in taxable years beginning after December 31, 2021. In addition, Roth conversions are eliminated for both IRAs and employer-sponsored plans for all taxpayers with taxable income over $400,000 for single filers, $450,000 for joint filers, and $425,000 for heads of households. Effective for distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.
Items Excluded:
- Highest marginal individual ordinary income tax rate increase to 39.6% from the current 37%
- Maximum capital gains tax rate increase to 25% from 20%
- Corporate income tax increase (from flat 21% to a maximum graduated rate of 26%)
- Reduction in the estate and gift tax exemption, and the generation skipping transfer tax exemption, to roughly $6,000,000 effective after December 31, 2021
- Substantial changes to Grantor Trust rules
- Loss of valuation discounts on passive “non-business” assets
While the bill is expected to be brought for a vote in the House in the imminent future, as of the writing of this post, the exact timeline is unclear. Although we can anticipate further revisions to the bill in the Senate and/or House, it is also unclear what will be included in such revisions.
At WMS, we continue to work with our clients, their attorneys, and CPAs to achieve optimal planning results regardless of the unknowns in Washington. As always, your advisory team is available to address any questions or concerns about your family’s specific situation.
Please note that the above information is being provided for informational purposes only. WMS is neither a law firm or accounting firm, and none of the above information should be viewed as legal, tax, or accounting advice.
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