LUTZ BUSINESS INSIGHTS
“build back better act” Proposed tax changes + how will you be affected?
The House Ways and Means Committee has released important tentative tax changes as part of the proposed “Build Back Better Act,” which includes a $3.5 trillion infrastructure plan. Sections of the bill are still under debate, and the provisions may change as the bill nears a vote. The House may vote as early as September 27th. Below is a list of the major changes we are monitoring, which would be effective for tax years beginning after 12/31/2021 unless otherwise noted.
- Top individual tax rate of 39.6% when taxable income is over $400,000 for a single taxpayer ($450,000 if married).
- New 3% surtax on individuals with a modified adjusted gross income over $2.5 million for a single taxpayer ($5 million if married).
- Expansion of the 3.8% net investment income tax (NIIT) to net investment income derived in the ordinary course of business for single taxpayers with a taxable income over $400,000 ($500,000 if married).
- Top capital gain rate changed to 25%. Unlike previous proposals, the capital gain rate change would not be retroactive but would be effective as of the enactment date of the bill.
- Top tax rate for C-Corporations would be changed to 26.5%. A graduated system would apply to C-Corporations with under $10 million in income. The first $400,000 would be subject to tax at 18%, the next $4.6 million would be taxed at 21%, and amounts over $5 million would be taxed at 26.5%.
- Qualified business income deduction (QBI, 199A) would be limited to $400,000 for a single taxpayer ($500,000 if married). However, the 199A(g) Cooperative DPAD deduction does not seem to be impacted.
- New distribution requirements would apply to single taxpayers with over $400,000 taxable income ($450,000 if married) with individual retirement accounts (IRAs) worth over $10 million.
- The estate and gift exemption amounts would drop early to $5 million adjusted for inflation ($5.85 million), down from $11.7 million for 2021. The “step-up in basis” would be preserved, and the tax rate would stay at 40%.
- A common estate planning technique using sales to Intentionally Defective Grantor Trusts (IDGTs) and Spousal Lifetime Access Trusts (SLATs) would now be taxable for income tax purposes.
- The following items are not currently part of the bill: adjustments to 1031 like kind exchanges, adjustment to the $10,000 state income tax itemized deduction limitation, and additional self-employment tax imposed on earnings over $400,000.
If you have any questions, please contact us.
Last updated: 9/20/21
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