President Biden and Democratic lawmakers in the House Ways and Means Committee are advancing legislation to implement the American Families Plan as part of the Build Back Better Act (“BBBA”). Of course, it has to pass through the House and Senate floors before being enacted, and certain details may be changed before all is said and done. However, I would like to review some of the new tax proposals within the Build Back Better Act, which may become law.
Some of the apparent general goals of the BBBA include increasing income tax rates for wealthier individuals, while also raising capital gains tax rates and reducing the estate and gift tax exemption amounts. There are a few significant tax issues I will highlight.
Individual Income Taxes
In its current form, probably the most significant change would be to increase the top individual income tax rate to 39.6 percent for single filers who make $400,000 or more, head of household filers who make $425,000 or more, and joint filers who make $450,000 or more.
In addition, the BBBA would create a 3 percent surcharge on modified adjusted gross income above $5 million. It would also prohibit individuals from contributing to individual retirement accounts (IRAs) once balances reach $10 million, and the new tax plan would then accelerate minimum distributions for those IRAs.
Capital Gains Taxes
The top capital gains tax would be increased from 20 percent to 25 percent. The tax brackets for capital gains would also be raised to $400,000 for single filers, $425,000 for head of household filers, and $450,000 for joint filers. The BBBA also proposes extending the holding period for carried interest from three (3) years to five (5) years.
Estate and Gift Taxes
Under the existing law, the estate and gift tax exemption is set to “sunset” on December 31, 2025, with the exemption returning to $5.49 million adjusted for inflation (approximately $6,000,000) starting January 1, 2026. The American Families Plan aims to revert the exemption amount at an earlier date. Starting in 2022, the lifetime estate and gift tax exemption would return to a maximum of $6,020,000, with related changes be made to the unified estate tax credit.
Pass-Through Business Taxes
Section 199A pass-through deduction amounts would be limited to the maximum values of $500,000 for joint filers, and $400,000 for single filers. The Net Investment Income Tax (NIIT) would also be affected, with the base of 3.8 percent NIIT expanded to apply to active business income for pass-through firms. The active pass-through loss limitation that was temporarily enacted as part of the TCJA would become permanent under the BBBA.
Corporate and International Taxes
One goal of the BBBA appears to be a return to a more progressive corporate income tax rate structure. The top rate under the new plan would be 26.5 percent, which applies to a corporate income above $5 million.
Like it or not, the BBBA is a reminder that the tax law frequently changes and there are major changes with each new administration. Whether you are already wealthy or are now working towards financial independence, it is important that you be familiar with the existing tax law, proposed changes to it, and other issues and factors that can affect your long-term plan. This includes having and knowing the details to your estate plan, which can then be adjusted periodically as your circumstances, the tax laws, and the overall economy changes.
For help with your estate planning, business planning and tax planning needs, contact me today.
