Potential Tax Implications of the Build Back Better Plan
November 24, 2021
The U.S. House Passes the Build Back Better Act
The U.S. House of Representatives narrowly passed a new version of President Joe Biden’s Build Back Better plan on November 19, 2021. That bill must still be passed by the U.S. Senate before going to the President’s desk for his signature, and it is subject to additional changes and an uncertain future given the Senate’s razor-thin Democratic majority. The most significant tax changes within the current bill are summarized below.
Individual Income Taxes
- The state and local tax (SALT) deduction limit is increased from $10,000 to $80,000 ($40,000 for trusts and estates or married filing separately) for tax years from 2021 through 2030.
- Net investment income tax of 3.8% is expanded to include pass-through income from S corporations, LLCs, or partnerships even if the taxpayer is actively involved in the business. This change would not apply to distributions taken as salary that are subject to FICA or self-employment taxes. This provision applies to single filers and trusts and estates with income over $400,000, and married filing jointly with income over $500,000 for tax years after December 31, 2021.
- A 5% surcharge is added for modified adjusted gross income over $10 million – the same limit for single or married filing jointly, as well as an additional 3% for modified adjusted gross income over $25 million. The limit for trusts and estates is $200,000 for the 5% surcharge with an additional 3% surcharge for income over $500,000. This proposal would be effective for tax years after December 31, 2021.
- “Back Door” Roth conversions – that is, the conversion of portions of after-tax traditional IRA to a Roth IRA – will not be permitted after December 31, 2021.
- Roth conversions are being eliminated for taxpayers with taxable income over $400,000 for single tax filers, and $450,000 for married filing jointly beginning with tax years after December 31, 2031.
- Any individual with an aggregate balance over $10 million in Roth IRAs, traditional IRAs and defined contribution plans will be required to take a minimum distribution of 50% of the amount by which the limit is exceeded. Anyone with balances over $20 million will need to take a distribution that brings the balance below $20 million, taking first from Roth plans. This section will not be effective until after December 31, 2028.
Previous Proposals That Did Not Make It Into This Bill Include:
- No change to capital gains tax rates.
- No change to top individual income tax rate.
- No elimination of Section 1031 exchanges.
- No change to Federal Estate and Gift Tax Exemption.
- No change to step-up in cost basis at death.
- No change to grantor trust rules.
- No changes to rules for valuation discounts on the transfer of nonbusiness assets.
- No prohibition on private equity investments in IRAs.
As mentioned earlier, the fate of this bill in the Senate is far from certain, and more updates are expected in the coming weeks. If you have questions about your own finances, please reach out to your Trust Advisor or Relationship Manager or any of our teammates who will be happy to speak with you.