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House Passes Economic Package With Tax Changes

On November 19th, the House of Representatives passed the “Build Back Better Act,” an economic package of nearly $2 trillion that focuses on climate change and social programs.

The bill now heads to the Senate, where debate is expected to begin in December. The Senate is likely to make changes to the bill in order to win the support of moderate Democrats in that chamber. If the Senate passes a modified version of the legislation, it will have to return to the House for a final vote.

The House-passed bill contains several tax-code changes that could impact individual investors, though far fewer than were in the original draft of the legislation. An earlier draft proposed a raft of tax increases on wealthy individuals, including a hike in the top individual income tax rate, increased taxes on capital gains and dividends for wealthier filers, and a reduction in the amount of inherited assets exempt from the estate tax. But moderate Democrats in the Senate balked at many of the tax increases on individuals, producing a weeks-long stalemate as progressives and moderates haggled over the details of a compromise.

The revised legislation includes a new surtax on the wealthiest taxpayers, a significant increase in the state and local tax (SALT) deduction and several changes to retirement savings. The bill also establishes a new 15% minimum tax for corporations, imposes a 1% tax on stock buybacks and increases funding for the IRS to boost enforcement or underpayment and non-payment of taxes.

The bill includes funding for expanded health-care coverage, affordable housing, universal pre-kindergarten and other child-care programs; expanded Medicare benefits to cover hearing; four weeks of paid leave; and climate-change and green-energy provisions. But the compromise required eliminating a number of proposals that were priorities for the president and progressives on Capitol Hill, including Medicare coverage for dental and vision and free community college.

Here is a look at what’s in and what’s out of the bill when it comes to tax provisions:

Proposal

IN or OUT?

Comments

Individual income tax rates

OUT

The original House bill proposed increasing the top rate from 37% to 39.6% for individuals over $400,000 in income, but the proposal was dropped from the version of the Build Back Better Act that was approved by the House on November 19.

Surtax on wealthy individuals

IN

A 5% surtax would apply to individuals with income over $10 million. An additional 3% surtax would apply to income over $25 million.

Capital gains

OUT

The original House bill proposed a new top rate on capital gains and dividends of 25% for individuals with more than $400,000 in income, but the proposal was dropped from the version passed by the House on November 19.

Estate tax

OUT

Earlier in 2021, there were proposals to make changes to the estate tax, either by ending the step-up in basis or by reducing the amount of inherited assets that would be subject to the tax. In the end, no changes to the estate tax were included in the bill.

State and Local Tax (SALT) deduction

IN

The $10,000 cap on the deduction for state and local taxes was imposed in 2017. The House-passed Build Back Better Act increases the exemption amount to $80,000 through 2030. However, the Senate is widely expected to change the provision when it considers the bill in December.

“Backdoor” Roth IRA conversions

IN

Beginning in 2022, individuals would be prohibited from converting after-tax contributions (to either a 401(k) or a traditional IRA) to a Roth account.

Corporate Minimum Tax

IN

The bill imposes a 15% minimum tax on corporations to ensure that they cannot use loopholes and incentives in the tax code to pay a lower rate.

Cap on aggregate retirement account balances

IN

The bill would prohibit individuals with aggregate savings of $10 million or more in tax-advantaged retirement accounts and income above $400,000 from making any more contributions to IRAs. Individuals would also be required to take required minimum distributions (RMDs), regardless of their age. More stringent distribution requirements would apply to individuals with aggregate retirement savings balances of greater than $20 million. These provisions would take effect beginning in 2029.

Roth conversion limits

IN

The House bill prohibits Roth IRA conversions for wealthier taxpayers (individuals earning more than $400,000 or couples earning more than $450,000) beginning in 2032.

Billionaires’ tax on unrealized gains

OUT

An idea was floated in the Senate to levy an annual tax on unrealized gains for individuals with $1 billion+ in assets. But the plan did not attract enough support and was scrapped.

 

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