In September, we gave an update on the ongoing tax reforms in the Bipartisan Infrastructure bill being proposed to Congress by the Biden Administration. On November 15, 2021, President Biden signed the 2,702-page $1.2 trillion Bipartisan Infrastructure Investment and Jobs Act into law. The bill will put $550 billion of new investments into transportation, broadband and utilities. The funding for this bill will go out over a five-year period. The case has also been made for Congress to pass a $2.3 trillion complementary bill focusing on investment of the social safety net and climate policy, known as the Build Back Better plan. On November 18, 2021, the House passed the Build Back Better Act legislation and sent it to the Senate. These two bills would result in $3.5 trillion in spending within the first 12-18 months within the Biden administration.
To pay for the new Bipartisan Infrastructure bill and proposed Build Back Better Act, proposed tax increases have included: raising the highest bracket’s income tax rate, taxing capital gains at ordinary rates, eliminating stepped-up basis on inherited property, making changes to 1031 exchanges, and a “billionaires tax” on value of unsold assets.
Many of the tax reforms proposed in the September 13th, 2021, version submitted by the House Ways and Means Committee have been dismissed or revised in the Build Back Better Act.
While nothing is set in stone with these changes, it’s important for taxpayers to keep themselves informed on the Build Back Better Act tax proposals and in turn be prepared for possible tax increases.
Key Tax Items in the Build Back Better Act
SURTAX ON HIGH INCOME TAXPAYERS
The Build Back Better Act proposes a 5% of modified adjusted gross income from $10 million to $25 million ($5 million to $12.5 million for married taxpayers filing a separate return). The tax rate will jump an additional 3% on income of more than $25 million ($12.5 million for married taxpayers filing separately). This means an 8% surtax would apply to the highest earners by paying a top 45% federal marginal income tax rate on wages and business income. The current rate is 37%.
NET INVESTMENT INCOME
The Build Back Better Act proposes the new net investment income (NII) to be 3.8% tax for trade or business income for taxpayers earning more than $400,000 annually ($500,000 for married filing jointly). Net operating losses would no longer be accounted for in determining NII. Currently, trade or business income earned by an individual is not subject to the 3.8% NII tax.
SURTAX ON NON-GRANTOR TRUST
The Build Back Better Act proposes a 5% tax would apply to the adjusted gross income (AGI) of non-grantor trust more than $200,000. An additional 3% tax would apply to AGI on a non-grantor trust more than $500,000. The higher proposed threshold may crate an incentive to make larger distributions to trust beneficiaries.
CORPORATE ALTERNATIVE MINIMUM TAX
The Build Back Better Act proposes companies with a large international footprint that report $1 billion in annual profits for three consecutive years would be subjected to a minimum 15% tax rate. The current rate is 10.5%.
Dismissed and/or Revised Tax Reform Proposals
1031 EXCHANGES & STEP-UP BASIS
The proposed changes to 1031 exchanges and the elimination of the step-up basis tax were dismissed and were not included in the September 13th, 2021 tax reform proposal. Please refer to our September 13th Tax Reform white paper.
CAPITAL GAINS TAX RATE INCREASE
In the September 13th proposal, a tax increase from 20% to 25% has been dismissed and is not mentioned in the Build Back Better Act.
TOP INDIVIDUAL INCOME TAX RATE INCREASE
In the September 13th proposal, a tax increase from 37% to 39.6% in individual income tax has been dismissed and is not mentioned in the Build Back Better Act. Please note the Surtax on High Income Taxpayers in the above paragraph.
ESTATE AND GIFT EXEMPTION AMOUNT
In the September 13th proposal, high income individuals, trusts, and estates were subject to an additional 3% tax under certain income. This has been dismissed and is not mentioned in the Build Back Better Act.
CORPORATE TAX RATE
In the September 13th proposal, the flat corporate income tax was proposed to change to a graduate rate structure. This has been dismissed and is not mentioned in the Build Back Better Act.
In the September 13th proposal, the period that an asset must be held was extended from three to five years to receive the long-term capital gains rate. This has been dismissed and is not mentioned in the Build Back Better Act.
In the next few weeks, we will continue to watch the fluid tax proposals. It is expected the Build Back Better Act could be brought to the floor of the Senate as early as mid-December.
If you are interested in getting more information, feel free to contact SRS NNLG or reach out directly to any of our licensed real estate professionals.