fAfter more than two months of negotiations in the US Congress, a slimmed-down version of the “Build Back Better Act” narrowly passed the US House of Representatives on November 19, 2021. All but one House Democrat voted for the measure, which united Republicans in opposition. Compared to the initial set of proposed revenue raisers that was released by the House Ways and Means Committee on September 13, 2021, the revenue-raising provisions in the legislation that passed the House are more modest in scope and result in only a few changes to the way individual taxpayers and family wealth are taxed. The summary below describes provisions in the House-passed bill that are most likely to affect individual taxpayers and also discusses portions of the original proposal that were cut from the legislation that passed the House. The US Senate is expected to make changes in order to capture the votes needed for passage.
NOTABLE INCLUSIONS
Income Tax
The legislation contains two surcharges on high income individuals, estates and trusts effective after December 31, 2021. A 5% surcharge will be imposed on an individual’s modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for a married individual filing separately; $200,000 for estates and trusts) and an additional 3% surcharge will be imposed on MAGI that exceeds $25 million ($12.5 million for a married individual filing separately; $500,000 for estates and trusts).
All trade or business income earned by taxpayers earning more than $400,000 ($500,000 for married filing jointly; $13,050 for trusts) will be subject to the 3.8% Net Investment Income Tax (NIIT). The NIIT does not apply to income that is subject to self-employment tax. Under prior law, active business income earned through pass through entities was not subject to NIIT.
The cap on the state and local tax (SALT) deduction will be raised from $10,000 to $80,000 through 2030. Trusts and estates will be limited to $40,000. This provision applies for the 2021 tax year.
The capital gain exclusion rates for qualified small business stock (QSBS) will be limited to a 50% exclusion (down from 75% and 100%) for individuals earning more than $400,000 and for trusts and estates regardless of income. This rule is effective for sales after September 13, 2021, unless the seller had a binding contract entered into on or before that date and if the sale occurs by year-end.
Individual Retirement Accounts (IRAs)
Taxpayers with an adjusted gross income above $400,000 ($450,000 for married filing jointly) will be prohibited from completing Roth conversions starting in 2032. In addition, the legislation also includes a general prohibition on “backdoor” Roth conversion of amounts held in qualified retirement plans, if any portion of the distribution that is being converted consists of after-tax contributions. This provision is effective starting in 2022. To read more click here.
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