Build Back Better Act (BBB) is expected to be signed into law before Thanksgiving!
On October 28, 2021, the House Rules Committee released a revised bill summarizing the Democrats’ compromise on their budget reconciliation package proposal for The Build Back Better Act. Unfortunately, after weeks of discussions regarding tax rate increases for individuals, corporations, capital gains, and the billionaire income tax provision were shot down the same day it was formally proposed. As a result, this new version of the Democrats’ reconciliation bill, costing nearly $2 trillion, differs significantly from the originally proposed Bill. Even though the provisions of the revised Bill continue to be subject to potential modifications, Congress expects to vote on the Bill in the first week of November, but realistically the Bill passage is more likely to be signed close to Thanksgiving.
Despite the momentum of the former BBB proposals, the revised proposed changes to raise the highest marginal income tax rate for individuals from 37% to 39.6%, for corporations from 21% to 26.5%, and capital gains from 20% to 25%. The current rates will remain unchanged for tax year 2022. Also eliminated from the revised Bill are the majority of the retirement-related provisions.
The current version includes tax changes to pay for the legislation, including:
- A surtax of 5% on personal income above $10 million and 3% on income above $25 million
- A 15% minimum tax on corporate profits of large corporations with over $1 billion in profits
- A 1% tax on stock buybacks
- A 50% minimum tax on foreign profits of U.S. corporations
Estate and Gift Tax Exemptions
The proposal to decrease the estate and gift tax exemption from its current $11.7 million to about $6 million per individual next year was dropped as well as changes to grantor trusts that would have had unfavorable effects on irrevocable life insurance trusts, grantor retained annuity trusts, and the ability to continue funding grantor trusts such as spousal lifetime access trusts and other dynasty trusts. If the revised Bill passes, the gift and estate tax exemption amount will increase to $12 million per person based on inflation. Congress will need to address this soon since the lifetime exemption is automatically cut approximately in half at the end of 2025.
15% Corporate Alternative Minimum Tax on Large Corporations
Designed to raise revenue from large corporations without explicitly raising the 21% corporate income tax, the revised proposal would apply a 15% minimum tax on corporations posting annual incomes on their financial statements in excess of $1 billion over a consecutive three-year period. The proposal preserves certain credits, such as research and development and clean energy, as well as the ability to carry forward certain losses, which could push the effective minimum rate for some corporations below 15%. Notably, the effective date for the new alternative tax is delayed until 2023.
Stock Buyback Tax
The revised Bill proposes a 1% tax surcharge on the amount a corporation spends to purchase its own stock. The amount subject to tax is reduced by the value of any stock issued during the taxable year. This includes the value of any stock issued to employees, even when such stock is issued in response to the exercise of an option to purchase the stock. The tax would not be deductible and would be effective for tax years beginning in 2022.
Tax Surcharge on High-Income Individual, Estates, and Trusts
Beginning in 2022, the revised Bill would create a new 5% surcharge on individuals with modified adjusted gross incomes in excess of $10 million and an additional 3% surcharge for such income above $25 million. For estates and trusts, the same rates apply at modified adjusted gross income over $200,000 and $500,000, respectively. In addition, modified adjusted gross income for individuals would be calculated before taking into account charitable and mortgage interest deductions. For individuals with modified adjusted gross income in excess of the $25 million, the proposal would create a highest marginal effective federal capital gains rates of 31.8% (20% capital gain rate + 3.8% net investment income tax + 5% tax on the gain above $10 million + an additional 3% tax on gains in excess of $25 million) and a highest marginal federal ordinary income tax rate of 45% (37% + 8%). This rate excludes the 3.8% net investment income tax on non-wage income that may be applicable to owners of pass-through entities that distribute income subject to the net investment income tax.
Expansion of Net Investment Income Tax
Under current law, the 3.8% net investment income tax applies only to passive investment income (e.g., interest, dividends, and gains from the sale of stock). The revised proposal mirrors the proposal from House Ways and Means and expands the application of the tax to include income derived in the ordinary course of business or active business income, but only for taxpayers with taxable income of $400,000 or more ($500,000 for taxpayers filing jointly). The broader application of the tax would be effective for tax years beginning January 1, 2022. Therefore business owners should consider whether it makes sense to accelerate certain income into the current tax year.
Qualified Small Business Stock
Under Internal Revenue Code Section 1202 of the Internal Revenue Code, a portion (or all) of the capital gain from the sale of certain qualified small business stock may be excluded from federal tax. The revised Bill remains the same as the House’s version released earlier in September by reducing special 75% and 100% exclusion rates to 50% for taxpayers with adjusted gross incomes equal to or exceeding $400,000. The revised Bill slightly changes the effective date from the proposed Bill for sales and exchanges to or after September 13, 2021. The exception for sales or exchanges made pursuant to a binding contract in effect on or before September 13, 2021, remains in the revised proposal. These same limitations would apply to trusts and estates.
Wash Sale Expansion
Federal tax laws have long prohibited owners of stock and other securities from selling the stock at a loss, repurchasing the stock within 30 days, and claiming the loss. The revised proposal expands the wash sale rules to cover commodities, currencies, and digital assets. The provision would apply to sales and other dispositions beginning after December 31, 2021.
Some of the other non-tax provisions include:
Child Tax Credits
Provide households up to $3,600 (or $300 per month) in tax cuts per child by extending the American Rescue Plan’s expanded Child Tax Credit. The Build Back Better plan will provide monthly payments to the parents of children for 2022, $300 per month per child under six and $250 per month per child ages 6 to 17.
Earned Income Tax Credit (EITC)
The BBB plan extended the expanded Earned Income Tax Credit (EITC) for around 17 million low-wage workers. The Build Back Better bill will extend the American Rescue Plan’s tripling of the credit for childless workers, benefiting 17 million low-wage workers, many of whom are essential workers, including cashiers, cooks, delivery drivers, food preparation workers, and childcare providers. For example, a childless worker who works 30 hours per week at $9 per hour earns income that, after taxes, leaves them below the federal poverty line. By increasing her EITC to more than $1,100, this expansion helps pull such workers out of poverty.
Education or Training Programs
The BBB plan will support parents who are working, looking for work, or participating in an education or training program, and who are making under 2.5 times their state’s median income by covering the cost of child care for children under six, so that child care costs no more than 7% of a family’s income. The plan also establishes universal and free preschool for more than 6 million 3- and 4-year-olds.
The largest part of the framework includes around $550 billion of investments in clean energy and other climate change initiatives, including:
• An enhancement of existing home energy and efficiency tax credits,
• An electrification-focused rebate program,
• A credit of up to $12,500 for U.S.-made, union-made electric vehicles
The framework allocates around $130 billion to expand Medicaid and reduce premiums for Affordable Care Act coverage. It estimates premiums for around 9 million ACA plan enrollees will fall by an average of $600 per year. The plan provides uninsured individuals living in states that did not expand Medicaid $0 ACA premiums to make health care more accessible. It also expands Medicare coverage for hearing services but not for dental or vision coverage.
The plan invests $150 billion in affordable housing provisions, including the construction and rehabilitation of more than 1 million affordable homes across the U.S. and investments in rental assistance and housing vouchers. It also includes down payment assistance for first-generation homebuyers to purchase their first homes.
None of these proposals made it into the revised Bill;
• Limitations of contributions for high-income taxpayers to certain retirement accounts in excess of $10 million,
• Requiring distributions from accounts in excess of $10 million,
• Prohibiting pre-and after-tax Roth conversions,
• Prohibiting investments in assets that require the retirement account owner to be an accredited investor.
• Changes to carried interest,
• Proposed limitations on the ability of high-income owners of pass-through entities to deduct up to 20% of the income from a qualified trade or business,
• Changes to the limitations on the deductibility of state and local taxes (SALT),
• Paid leave is not part of this version of BBB. Initially, the plan included 12 weeks of guaranteed paid family and medical leave for every U.S. worker, which was then reduced to four weeks, but ultimately no paid leave made it into the current version,
• Medicare dental and vision benefits were left out, as well as Medicare drug pricing negotiations. Free community college was also cut from this version of the Bill, and
• The Billionaires Income Tax is also not included, which would have taxed unrealized gains of certain assets.
For more information, explore the details of the BBB proposal provided here. The proposal Bill remains subject to change. The Wilke & Associates team will continue to keep you informed of any changes to the BBB plan.
Maria Stromple, CPA, MST
Maria is a Partner at Wilke & Associates, serving closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.