BUILD BETTER ACT PROPOSALS OVERVIEW
By, Associate Financial Planner, April Schultz
On November 19th, the House of Representatives passed President Biden’s Build Back Better Act. This $1.75 trillion bill focuses primarily on fighting climate change, providing greater access to childcare, and expanding health care coverage. It is now headed to the Senate to be negotiated.
The Build Back Better Act has been modified greatly since it was first announced. Many of the tax law changes that were listed in the original September 13th proposal have been removed, and no longer are included in the Build Back Better Act. These include the increased tax brackets for high income earners, the 25% capital gains rate, the removal of the step up in basis of an asset upon death, the reduction of the estate tax exemption, and the elimination of the intentionally defective grantor trust strategy. Again, all of these listed above have subsequently been eliminated from the bill.
While many significant tax law changes have been removed from the act, there remains a few important changes that that we would like to address. Please keep in mind that most of these tax changes only begin to affect taxpayers with Adjusted Gross Income over $400,000.
The material proposals to current tax laws are as follows:
- Retirement Account Limitations – For taxpayers with modified adjusted gross income exceeding $400,000 (single filers), or $450,000 (joint filers), contributions to a Traditional or Roth IRA would be prohibited if the taxpayer’s combined retirement accounts exceed $10 million. Accounts counted in this total include IRAs and defined contribution retirement plans. Taxpayers meeting these thresholds would also be required to take a minimum distribution the following tax year. These changes would apply beginning in the 2029 tax year.
- Roth Conversion Limitations – Beginning in the 2022 tax year, backdoor Roth contributions would no longer be allowed. This would apply to all taxpayers regardless of income level. Any conversion of after-tax contributions would need to be completed by the end 2021. In addition, Roth conversions for taxpayers with modified adjusted gross income exceeding $400,000 (single filers), or $450,000 (joint filers) would be prohibited. This would not take effect until 2031, allowing taxpayers 10 years to complete Roth conversions on pre-tax dollars from qualified retirement plans and Traditional IRAs.
- State and Local Tax (SALT) Deduction – The limitation on the deduction for state and local taxes would be raised from $10,000 to $80,000. This would begin in 2021 and stay through 2031.
- Extension of the Refundable Child Tax Credit – The increased Child Tax Credit, which was enacted in 2021, will remain through 2022.
- Net Investment Income Tax (NIIT) – For taxpayers with modified adjusted gross income exceeding $500,000 (joint filers), or $400,000 (single filers), all trade or business income would be subject to the 3.8% NIIT. This would include income earned from a trade or business in which the individual materially participates (including income from S Corporations) and would apply beginning in the 2022 tax year.
- High Income Surtaxes – Taxpayers would be assessed a 5% surtax on any modified adjusted gross income over $10 million, and an additional 3% surtax on any modified adjusted gross income over $25 million. This would include ordinary and capital gain income and would apply beginning in the 2022 tax year.
- Qualified Small Business Stock Treatment – The capital gain exclusion for the sale of qualified small business stock would be reduced for high income taxpayers. Taxpayers with adjusted gross income over $400,000 would only be able to exclude 50% of the gain when selling the small business stock. (Down from the current 100% capital gain exclusion). This would apply retroactively to sales after September 13, 2021.
- Limitation on Excess Business Losses – The current limit on deducting excess pass-through business losses would be made permanent (instead of sunsetting in 2025). The current law allows the taxpayer to deduct business losses against non-business income, up to $250,000 (single filers) or $500,000 (joint filers) above non-business income. The Build Back Better Act would also change how the loss is carried forward to subsequent years. The disallowed loss would be treated as excess business losses in the following years and would again be subject to the $250,000 (single filers) or $500,000 (joint filers) limits. This change would be effective retroactively for tax years beginning after December 31st, 2020.
We hope this give you a better understanding of the most recent updates to the proposed legislation and the potential impacts. As always, please feel free to reach out to your HC Team if you have any questions or concerns.
Photo by Louis Velazquez on Unsplash
