What Happened?
In recent weeks, Congress has been putting together the Build Back Better Act reconciliation bill, which contains many proposed changes to our current tax system. A high level summary of some of these tax changes is listed below. Please note that this is not current law, and there will likely be changes before this makes it through both chambers of Congress. All changes are effective for years beginning after 12/31/2021 unless otherwise stated:
Proposed Changes:
- Replacement of the current flat corporate rate of 21% with a graduated rate structure of 18% on the first $400,000 of income, 21% on income from $400,001 to $5,000,000, and a rate of 26.5% for income in excess of $5,000,000.
- Top rate for individuals increasing from 37% to 39.6%. This highest rate will apply to unmarried individuals with taxable income over $400,000 and married individuals filing a joint return with taxable income over $450,000.
- Top long-term capital gain rate for individuals increasing from 20% to 25%. This highest rate will apply to unmarried individuals with taxable income over $400,000 and married individuals filing a joint return with taxable income over $450,000. This is effective for gains realized after 9/13/2021. Gains recognized after 9/13/2021, but before 12/31/2021 that are made pursuant to a written binding contract which was in effect on 9/12/2021 would not be subject to the 25% rates.
- Net Investment Income Tax of 3.8% will now apply to any income derived in the ordinary course of a trade or business for single filers with over $400,000 of taxable income and joint filers with over $500,000 of taxable income.
- Qualified Business Income Deduction will be limited to a maximum deduction of $400,000 for single filers and $500,000 for joint filers.
- An additional tax of 3% will be assessed on modified adjusted gross income in excess of $5,000,000.
- The gain exclusion from Qualified Small Business Stock (Section 1202) will not apply to taxpayers with adjusted gross income equal to or exceeding $400,000. This applies to sales and exchanges after 9/13/2021 with an exception for transactions entered into prior to 9/13/2021.
- Business losses in excess of $250,000 for single taxpayers and $500,000 for joint filers (adjusted annually for inflation) would be carried forward as losses subject to the same limitation in the subsequent tax year.
- Gift and Estate tax lifetime exemption reduced from $10 million to $5 million (adjusted annually for inflation).
- GILTI (Global Intangible Low Tax Income) and FDII (Foreign-Derived Intangible Income) tax rates will effectively increase to 16.5625% and 20.7% respectively.
- Virtual currencies and other digital assets will be subject to wash-sale rules that prevent taxpayers from realizing a loss from the sale of digital currency and repurchasing the asset within 30 days.
- Irrevocable grantor trusts would be taxable in the estate of the grantor. This applies only to future trusts and future transfers.
- Sales to grantor trusts would be taxable events for the grantor-seller.
- Valuation discounts for partial interests, or minority control of passive assets would be eliminated.
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There are also a couple changes that we had been anticipating in the latest proposal, but were not included. There is no proposed capital gain tax assessed on appreciated property at date of death. There is no proposal to remove the step-up in basis of assets at date of death. There is no elimination or limitation on tax deferrals from like-kind exchanges.
Please reach out to your HKG accounting professional if you have any questions.
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