After months of negotiations, the Biden administration and Democrats in Congress are nearing a final version of the Build Back Better Act. The $1.75 trillion bill funds a number of the administration’s top priorities, including expanded school spending, clean energy initiatives, expanded home care provisions, more child care credits and funding for other hard infrastructure expenditures. New and revised taxes included in the bill would pay for those priorities.
The previous version of the bill – which had a total price tag of $3.5 trillion – made big changes to corporate, personal and other taxes, as well as retirement plans. Most of those provisions didn’t make it into this slimmed-down version, but there are still changes you and your clients should know about.
As with the last draft of the bill, this proposal is not final. Democrats in the Senate plan to pass the bill through the budget reconciliation process, which means they need all 50 of their members on board. That could mean a few last-minute changes are still in store ahead of a final vote. Furthermore, just because certain provisions were cut, especially around retirement plans, it doesn’t mean that they are off the table completely. They could reappear in the retirement-focused bill, called SECURE Act 2.0, which also has a decent chance of being modified and passed by end of year.
A Surtax for Top Earners
The BBB Act leaves the highest personal income tax bracket unchanged at 37%. However, there would be a 5% surtax on annual modified adjusted gross income over $10 million for all individuals except for those married filing separately ($5 million). There would then be an additional 3% surtax on income over $25 million. This would directly impact only the wealthiest 0.02% of Americans.
A Higher Corporate Tax Rate
The top federal corporate tax rate would remain at 21%, but large companies would now face a minimum 15% rate. That minimum rate would apply to corporations with more than $1 billion in profits annually over a three-year period, and would put a floor on how much they could lower their tax rate through loopholes. For instance, Amazon has reported $45 billion in profits over the past three years, yet paid an effective tax rate of 4.3%.
Additionally, the bill would impose a 1% surcharge on stock buybacks by large corporations.
International Tax Overhaul
International taxes on U.S. multinational companies have been a strongly debated topic for the past few years, preceding even the changes that took place in 2017 as part of the Tax Cuts and Jobs Act. The new changes would increase the taxes on foreign profits from U.S. multinational companies.
The goal here is to not allow companies to side-step U.S. taxes by claiming they pay low taxes in other countries that essentially serve as a tax haven. The change would, in essence, create a minimum tax for certain international companies operating in the U.S. It’s projected this could raise hundreds of billions of dollars in new revenue and potentially incentivize more operations to move to the U.S. While there was a proposed minimum corporate tax in the earlier BBB draft, this was modified a bit in this version of the bill.
‘Wash Sale’ Rules for Cryptocurrency
Starting in 2022, cryptocurrencies like bitcoin and ethereum would be subject to anti-abuse rules that currently apply to stocks, bonds and other securities. “Wash sale” rules are intended to prevent investors from taking advantage of tax benefits after selling a losing investment, then immediately buying back that same investment at a lower cost.
Currently, crypto investors can sell currency for a loss and claim a tax benefit, then buy the same currency back shortly after, potentially at a lower price than it was sold. Under the proposal, crypto investors would have to wait 30 days before rebuying that currency to avoid penalties.
Additional Taxes on Large Trusts and Estates
The new tax on money taken from trusts or estates starts at a 5% rate for anything in excess of $200,000, with an additional 3% for anything over $500,000. Your clients may not be able to avoid this tax if they inherit a large IRA or other retirement account from a non-spouse, because the SECURE Act requires them to withdraw the money within 10 years. So, if a client inherits a $5 million IRA, they’d be looking at $500,000 withdrawals each year (plus any market gains), and could get pushed into the full 8% tax rate depending on their modified adjusted gross income (MAGI).
Child Tax Credit
The enhanced credit – passed in March through the American Rescue Plan – will continue through 2022. It provides $3,000 for children ages 6 to 17 (up from $2,000), with an additional $600 for children under the age of 6. The credit begins to phase out above certain income levels – $75,000 for individuals or $150,000 for married couples.
The bill calls for an $80 billion increase in funding for the IRS – several projections show that the IRS, if properly funded, could raise more money by simply enforcing current laws. One CBO report suggested that with this $80 billion increase, the IRS could raise roughly $200 billion in new revenue.
What’s Not Changing
The previous draft of the BBB Act included numerous changes to retirement accounts, including limits on traditional IRA contributions, changes to required minimum distributions for high-income earners, limits on Roth conversions and an end to so-called “back-door” Roth conversions.
All of these retirement planning changes have been scrapped for now. Because back-door Roth conversions are still allowed, it may make more sense for your clients with large retirement accounts to convert assets to Roth IRAs over time so that their estates will not be subject to the 10-year withdrawal rule. (Life insurance is another planning tool you could use to help clients alleviate the tax burden on their beneficiaries.)
Capital Gains Tax
The top rate for taxes on capital gains and dividends would remain at 20%. The previous proposal would have raised it to 25%.
The estate and gift tax exemption would remain at $11.7 million for individuals ($23.4 million for married couples), and no changes would be made to the step-up in basis rule. The previous bill would have returned the exemption to $5 million ($10 million for married couples) in 2022, though it also made no changes to the step-up in basis rule.
What Could Still Be Added to the Bill?
This version of the BBB Act doesn’t include any changes to the cap on state and local income tax (SALT) deduction. That amount – which allows filers to reduce their federal tax burden by the amount they pay in state and local taxes – was capped at $10,000 as part of 2017’s Tax Cuts and Jobs Act, and that cap will remain in place through 2025.
Democrats had debated several changes to the cap – one proposal was to suspend the $10,000 limit for two years, reinstate it in 2024 and then remove it entirely starting in 2026 – but nothing made it into this version of the bill.
The Biden administration and Democrats in Congress are pushing to pass the Build Back Better Act relatively quickly, and the current framework will likely be close to the final version.
And though this version dropped many of the previously proposed changes to personal taxes and retirement planning, those provisions may still make it into the SECURE Act 2.0. Much like with the BBB Act, however, there’s no guarantee they’d survive negotiations among the Democrats’ narrow Senate majority.