Earlier this year, the Biden Administration unveiled the Build Back Better Framework outlining the president’s legislative agenda in two major areas: “hard infrastructure” and “human infrastructure.” The multi-trillion-dollar plan has undergone numerous revisions as the Biden administration and Democrats in Congress worked to hammer out a set of bills that could pass a Congress narrowly controlled by the Democratic party. These efforts have been ongoing, sometimes fast-changing, and highly uncertain throughout the year, but the outcome of this process is likely to impact you as a U.S. taxpayer in one way or another.

While nothing in politics is guaranteed, an October 28th announcement by the administration makes it seem increasingly likely that two compromise bills will ultimately reach President Biden’s desk, potentially before the end of the year. Your tax professionals at Geffen Mesher are following developments closely and will immediately read into the final plan in all of its detail once it’s released. In the meantime, we will be examining major updates in legislative negotiations and discussing planning techniques to consider for a tax world where these proposals become law.

For this first installment, we have compiled and analyzed the most recent proposals presented by the House Ways and Means Committee. This article will focus on the revenue side of the process, not on spending proposals, as these are the most relevant provisions for taxpayers’ near-term planning efforts. A careful consideration of these proposals is advised if you meet any of the following criteria:

• High-earning families and individuals with income thresholds that exceed $400,000 for single filers (S), $425,000 for heads of household (HOH), and $450,000 for married couples filing jointly (MFJ). Note that additional changes may impact households with an annual adjusted gross income in excess of $5,000,000.
• Estates transferring assets with a valuation in excess of $5,000,000.
• Corporate shareholders and partners with qualified business income in excess of $2,000,000.
• S. corporation with international operations and owners of controlled foreign corporations.
• Taxpayers generating high net investment income.
• Individuals and families holding assets in trust as part of overall estate plan.
• Financial involvement in corporate and pass-through entities at all levels.
• Self-employed and business owners earning an excess of $400,000 annually.

Key Tax Proposals

Below, you will find a list of some key provisions released by House Ways and Means Committee in mid-September, many of which are expected to be included in the final version of the Build Back Better Act.

Individual Income Tax

• Increase the top marginal tax rate from 37% to 39.6% on taxpayers with taxable income exceeding 450,000 (MFJ), 425,000 (HOH), and 400,000 (S).
  • Under the Tax Cuts and Jobs Act (TCJA), rates were set to revert back to 39.6% after December 31, 2025, so this proposal moves this sunset forward to December 31, 2021.
• Increase the top marginal capital gains tax rate from 20% to 25% for taxpayers in the 39.6% tax bracket.
• An additional 3% surtax with be assessed on modified adjusted gross income exceeding $5,000,000 (MFJ and S) and $2,500,000 (MFS) for individual taxpayers, $100,000 for trust and estates.
• Prohibits additional contributions to IRA accounts with balances exceeding $10,000,000 and sets limitations on “back door” Roth IRA conversions. The provision also accelerates required minimum distributions.

Gift and Estate Tax

• The temporary increase in a lifetime gift and estate exemption will be terminated and restored to pre-TCJA levels of $5,000,000 adjusted annually for inflation. Under current law, an individual can transfer $11,700,000 of wealth free of estate tax.
• Eliminates the ability to claim a valuation discount on transferred property that retain a lack of marketability, are held with minority ownership, or owns an entity holding nonbusiness assets.
• Grantor trust will no longer be deemed as excludable from the estate if the descendant is the deemed owner of the trust.

Pass-through Income

• Section 199A Qualified Business Income (QBI) deduction will be limited to $500,000 (MFJ) and 400,000 (S). In other words, the QBI deduction will be capped once QBI reaches $2.5 million (MFJ), $2 million (S), and $50,000 for trusts and estates.
• Pass-through loss limitation rules enacted in TCJA will become permanent.
• Active business income from pass-through entities will now be subject to the 3.8% net investment income tax.
• Section 163(j) will no longer be applicable at the partnership or S-corporation level, instead, the provision will be applied directly to partners and shareholders.
• Establishes an election to make a tax-free reorganization from a S-corporation to a partnership during 2022 and 2023.

Corporate Income Tax

• Increase the top marginal corporate tax rate and restores a graduated tax rate structure as follows:
  • 18% on taxable income up to $400,000
  • 21% on taxable income between $400,000 and $5,000,000
  • 26.5% on taxable income greater than $5,000,000
• Deferral of worthless stock loss
  • Under current law, a corporation may claim a worthless stock loss deduction upon the liquidation of an insolvent subsidiary. This proposal would defer the recognition of loss until there is a complete disposal of the subsidiary’s property.

International Tax

• Limitation on foreign dividends received deduction. This proposal limits the allowable deduction to only dividends received by controlled foreign corporations (CFC).
• Under current law, dividends received from a foreign corporation not controlled by US shareholders are included, along with dividends received from CFC’s. This proposal repeals this aspect of IRC Section 245.
• Modifies the base erosion and anti-abuse (BEAT) tax provision for multinational corporation by increasing the BEAT to 12.5% beginning 2024 and 15% beginning 2016.