Build Back Better Act – Proposed Tax Law Changes

On Monday, September 13, 2021, the House Ways and Means Committee released proposed tax law changes related to the $3.5 trillion Build Back Better Act.  These changes are proposed and may not be included in the final legislation. However, we wanted to make you aware of the key provisions, even though the proposed legislation is subject to change.  We are actively monitoring this legislation and will continue to provide updates as they become available. We will also include planning opportunities for each of the relevant tax law changes.

Individual Income Tax­­

Marginal Tax Rates

• Top marginal tax bracket on ordinary income increases from 37% to 39.6%
  • Applies to married filing jointly taxpayers with taxable income over $450,000 (currently $628,301), $400,000 for single taxpayers (currently $523,601), $225,000 for married filing separately filers (currently $314,151), or $12,500 for trusts and estates. This means that more of your income will be taxed at higher rates.
• Proposed effective date: January 1, 2022

Surtax on High Incomes

• Additional 3% surtax on individuals with modified adjusted gross income over $5,000,000
• Proposed effective date: January 1, 2022

Long-Term Capital Gain Rate Increase

• Top rate increases from 20% to 25%.
• Proposed effective date: September 13, 2021 (date Act was introduced)

Expanded Wash Sale Rules

• Wash sale rules will apply to transactions in commodities, currencies, and digital assets
• If these assets are sold at a loss, then repurchased within 30 days, the loss is not recognized for tax purposes, but is instead added to the basis of the asset. These rules currently apply to transactions in stocks and other securities.
• Proposed effective date: January 1, 2022

Net Investment Income Tax Expansion

• Net investment income tax of 3.8% now assessed against all net investment income from a trade or business, unless subject to FICA taxes.
  • Applies to taxpayers with taxable income over $500,000 if married filing jointly and $400,000 for single filers, and to trusts and estates.
  • Proposed effective date: January 1, 2022
• Qualified business income Limitation
  • Limits Qualified Business Income Deduction (QBI) to $500,000 for married filing jointly or $400,000 for single taxpayers
    • Proposed effective date: January 1, 2022

Estate and Gift Tax

Unified Credit Decrease

• Lifetime exemption decreases to $5,000,000 (currently $11,700,000), adjusted for inflation
  • Exception for family farms – Lifetime exemption remains $11,700,000
  • Proposed effective date: January 1, 2022
• Valuation Discounts
  • Valuation discounts eliminated for transfers of non-business assets such as passive investments
  • Proposed effective date: Enactment of the Act (TBD)

Corporate Income Tax

New Marginal Rate Structure

• Changes from flat 21% rate to marginal tax rates of 18% on income up to $400,000, 21% from $400,000 to $5,000,000, and 26.5% above $5,000,000
• Personal Service Corporations are not eligible for graduated rates consistent with current law

Retirement Accounts

IRA and Roth IRA Contribution Limitation

• Prohibits contributions to Individual Retirement Accounts (IRAs) and Roth IRAs if the aggregate balance of taxpayer’s IRA, Roth IRA and defined contribution accounts (e.g., 401(k) account) exceeds $10,000,000
  • Limit on contributions only applies to single taxpayers with taxable income over $400,000 and married filing jointly taxpayers with taxable income over $450,000
  • Proposed effective date: January 1, 2022
• Required Minimum Distributions for Large Retirement Accounts
  • If taxpayer’s combined IRA, Roth IRA and defined contribution retirement account balances exceed $10,000,000, taxpayer must distribute in the following year 50% of the excess above $10,000,000. This required minimum distribution only applies to taxpayers in the top marginal tax bracket ($450,000 married filing jointly and $400,000 single)
  • If taxpayer’s combined IRA, Roth IRA, and defined contribution retirement account balances exceed $20,000,000, any excess must be distributed from taxpayer’s Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) amount needed to bring balance back down to $20,000,000 or (2) aggregate balance in Roth IRAs and designated Roth accounts in defined contribution plans. After fully distributing Roth balances, the taxpayer is subject to the 50% distribution rule applicable to balances above $10,000,000.
• Future Roth Conversion Limitation
  • Roth conversions of IRAs and employer-sponsored plans are prohibited for married filing jointly taxpayers with taxable income over $450,000 and single taxpayers over $400,000
  • As proposed, conversions can still be made regardless of income prior to January 1, 2032
  • Proposed effective date: January 1, 2032
• Back Door Roth Strategies Eliminated
  • Eliminates “Back Door Roth IRA” and “Mega Back Door Roth IRA” strategies by prohibiting all after-tax contributions to qualified plans (e.g. 401(k) accounts), and prohibiting after-tax IRA contributions from being converted to Roth regardless of income level.
  • Proposed effective date: January 1, 2022

Advisory services offered through The Nemes Rush Group LLC. Securities offered through J. Alden Associates, Inc., member FINRA/SIPC. The Nemes Rush Group LLC and J. Alden Associates Inc. are not affiliated. The information presented is for informational purposes only. Please consult your tax professional to determine the tax effects on your personal situation prior to making any investment.

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