TAX

Build Back Better Act Tax Proposals: Where Do We Stand?

Ryan McDonell Manager, CPA

22 November 2021

Back in March and April of this year, President Biden released a framework for traditional and “human” infrastructure provisions of the administration’s Build Back Better agenda. Traditional infrastructure provisions were included in the Infrastructure Investment and Jobs Act, which passed the Senate and House on a bipartisan basis and was signed into law by President Biden. In September, the remaining framework was put into writing as part of the House’s $3.5 trillion first draft of the Build Back Better Act (BBB).

Democrats intend to pass the BBB across party lines using reconciliation. Reconciliation is a special process that allows for legislation to pass the Senate with a simple majority (51 votes) instead of the typical 60 votes. Limits on how long reconciliation bills may be debated also make the process filibuster-proof. Lawmakers are limited in how often they may use reconciliation each year, and the proposals must generally be related to budgetary or revenue-related policies subject to the advice of a nonpartisan Senate parliamentarian. Reconciliation is often used by the party in power to advance an administration’s policy goals. For example, the Trump administration used reconciliation to pass the Tax Cuts and Jobs Act tax reform towards the end of 2017.

Democrats hold a slim 221-213 majority in the House and an even tighter margin in the Senate split 50-50 with Vice President Harris serving as the tiebreaker in Democrats’ favor. If all Democrats in the House and Senate agree on BBB, it can move through Congress without Republican opposition. However, over the last few months, differences between progressives and moderates within the Democrat party have delayed and reshaped the reconciliation bill to such an extent that many question “if” the bill will pass instead of “when.” To make concessions for party moderates, the latest version of BBB from early November is nearly half the size of the original $3.5T proposal coming in around $1.75T and leaves behind almost all the tax rate increase proposals.

Proponents of the bill are hoping for a passing vote by Thanksgiving in the House and before the end of the year in the Senate. It is unknown whether the reconciliation bill will survive the back-and-forth between party groups. In the meantime, taxpayers may plan around the latest draft of the legislation but should keep in mind that the proposals are likely to change before becoming law, if at all.

Removed…For Now
Arguably as important as what remains in the bill is which proposals have been removed. Just because these items have been taken out of the current draft of the BBB does not necessarily mean that they are gone for good. However, for the time being, several policies have been tabled to appease vocal congressmembers, including, for example:

      • Increasing top capital gain tax rate from 20% to 25%
      • Increasing individual income tax rate from 37% to 39.6%
      • Increasing top C corporation tax rate from 21% to 26.5%
      • Reducing the base estate/gift lifetime exclusion from $10M to $5M
      • Including grantor trusts in estate, treating distributions as gifts, and transfers as sales
      • Capping the QBI 20% deduction
      • Taxing unrealized gains for high income taxpayers
      • Reporting bank inflows and outflows to the IRS ($600 or $10,000 threshold)

Still In Play
Despite the omission of many flagship proposals, the current BBB draft still has several provisions that taxpayers should be aware of. Some notable items include the following:

Net Investment Income Tax 3.8% Expansion
The net investment income tax (NIIT) is a 3.8% tax imposed on investment income and passive activity income for married taxpayers with adjusted gross income in excess of $250,000 (or $200,000 for single filers). Income subject to this tax may include interest, dividends, stock sales, and income from K-1s if the owner does not meaningfully participate in business operations. Presently, income from nonpassive business interests is not subject to the 3.8%. This means that an owner who actively participates in business operations generally does not pay the NIIT on income from the related K-1 or on income derived from selling ownership in the business. The BBB proposal would expand the NIIT by including nonpassive income for married taxpayers with taxable income in excess of $500,000 (or $400,000 for single) starting in 2022. This could be a 3.8% tax increase on income that taxpayers receive from businesses they actively manage and from sales of said business interests.

New Surcharge Tax on High-Income
The BBB includes a proposal that would impose a 5% tax on modified adjusted gross income in excess of $10,000,000 and an additional 3% tax (totaling 8%) on MAGI in excess of $25,000,000 beginning in 2022.

State and Local Tax (SALT) Itemized Deduction Increase
Taxpayers are presently limited to deducting up to $10,000 of state and local taxes as an itemized deduction on their federal tax return. This $10,000 “cap” was introduced as part of the 2017 tax reform and is set to expire after 2025. The latest House BBB proposal would raise the cap to $80,000 in 2021 and extend the cap through 2031. Senate counterparts have already begun discussing alternatives to this proposal, such as retaining the $10,000 cap for taxpayers making more than $400,000.

Closing Backdoor Roth IRA Conversions
In order to contribute to a Roth IRA, taxpayers must meet certain adjusted gross income (AGI) levels. For 2021, contributions were limited if AGI exceeded $198,000 for a married couple (or $125,000 for single filers). As a workaround, taxpayers have been able to make contributions to nondeductible IRAs and then convert the nondeductible IRA to Roth, effectively creating a “backdoor” means of avoiding the Roth AGI contribution limits. The present BBB proposal would prohibit taxpayers from using this backdoor Roth conversion workaround beginning in 2022.

In conclusion, the size and contents of the BBB have changed drastically over the last couple months. Even now, about a week out from the Thanksgiving holiday, it’s hard to pin down how much of an appetite there is for the current draft of the bill. Taxpayers should proceed with caution as we monitor for more changes to the BBB and see if the bill eventually becomes law.