Potential Tax Changes in Biden’s “Build Back Better” Bill
November 5, 2021
HBE’s Rapid Response Team continues to monitor and review the potential tax changes that may be included within President Biden’s “Build Back Better” legislation. The bill, which has been the focus of significant negotiation between political parties in recent weeks, now lies on the floor of the House of Representatives with a vote expected as early as this afternoon. Although this bill would still need to go through the Senate and ultimately signed by the President, there are some important potential tax impacts that taxpayers should be aware of as we approach the end of the year.
Below, we have outlined a list of tax-related items that are included in the current draft of the bill, as well as a list of those items that are no longer included in the current draft of the bill. It is important to note that, as the bill moves through the process, these items and others could continue to change, be removed, or brought in.
Tax-Related Items Currently Included in the Bill
- 3.8% surtax on Ordinary Business Income. This would have an impact to many business owners, as when the individual’s modified adjusted gross income (MAGI) exceeds $400,000/$500,000 (single/joint), their ordinary business profits will begin to become subject to the 3.8% net investment income tax (NIIT).
- New surtaxes for the highest of high-income taxpayers. Ultra-ultra-high earners would be subject to additional taxation in the form of one or two surtaxes. Individuals with more than $10 million in income ($5 million for married filing single) would be subject to an additional 5% surtax. Income in excess of $25 million ($12.5 million for married filing single) would be subject to an additional-additional surtax of 3%. Thus, the true top rate for such individuals would be 37% ordinary rate + 5% surtax + 3% surtax + 3.8% NIIT = 48.8%.
- Reduction in the QSBS exclusion. The exemption on Qualified Small Business Stock (QSBS) would be reduced from 100%/75% to 50% for taxpayers with adjusted gross income (AGI) of $400,000 or more. The $400,000 appears to be a cliff, making managing the AGI of such individuals absolutely critical if they are close to that mark. Unfortunately, the $400,000 appears to include the gain from the sale, meaning that any sizeable sale may, in and of itself, prevent someone from being able to use the 100%/75% exemption. Lastly, this change is effective for sales on or after September 14, 2021, unless a binding agreement was signed beforehand.
- Limitation on excess business losses made permanent. Joint filers with business losses of more than $500,000 and single filers with business losses of more than $250,000 would continue to be unable to use those excess losses to offset other, non-business income. As well, the excess losses would only carryforward one year before expiring.
- Enhanced child tax credits remain for 2022. The enhanced child tax credits of $3,600 (under age 6) and $3,000 (over 5 and under 18) would continue through 2022. Pre-payment of some of the credit would continue as well, but at lower income thresholds than applied for 2021 (<$150,000 for joint filers, <$75,000 single filers).
- Changes to the SALT cap for itemized deductions. The $10,000 SALT cap will be adjusted to $72,500 beginning in 2021 and running through 2031. This would change the ability of many taxpayers to itemize when they haven’t been or have higher itemized deductions.
- IRA/retirement plan changes for ultra-wealthy. These changes are still in flux, but are primarily driven to the ultra-wealthy and very high balance plans ($10 million or more).
- New tax credits (primarily around electric incentives and climate change)
Tax-Related Items No Longer Included in the Bill
- The top ordinary income tax rate (which will remain at 37%).
- The ordinary income tax brackets (which will not be compressed and, in fact, may be in line for an inflation-adjusted increase for 2022).
- The top long-term capital gains rate (which will remain at 20%).
- The estate and gift tax exemption (which will likely eclipse $12 million per person in 2022, after the application of the inflation adjustment).
- Elimination of the backdoor Roth IRA or mega backdoor Roth.
- Create new required minimum distributions (RMDs) for high-income individuals with large retirement accounts.
- Limit the ability to invest IRA dollars in investments that require a minimum net worth, income, and/or level of education.
- Impose new reporting requirements on bank deposits and withdrawals.
Important Note on Employee Retention Credit
If the Build Back Better bill passes, it appears likely that the bipartisan Infrastructure Bill will also pass. This bill retroactively ends the Employee Retention Credit (ERC) program three months early, only runing through the third quarter of 2021. Which means that businesses would be unable to collect the credit for wages paid after September 30, 2021 (EXCEPT for certain start-up businesses).
Please keep in mind that it’s nearly impossible at this time to know exactly which items will make it through to the final bill. Most of these changes and discussions are being driven by the House. However, there could be substantial revisions to the bill when it makes its way into the Senate in order to gain final approval. We will continue to monitor the bill as it progresses, and provide additional updates as they become available.
This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.