Proposed New Tax Laws under the Biden Administration

The following article outlines proposed changes at the time it was written. Please note that legislative proposals can be changed, removed or approved during the negotiation process.

As negotiations continue in Washington, DC, we are anticipating some tax law changes outlined in two proposed laws under the Biden administration, the Build Back Better Act (BBBA) and the Bipartisan Infrastructure Bill (BIB), also known as the Infrastructure Investment and Jobs Act. 

Proposed Tax Provisions for Individual Taxpayers

The current version of BBBA includes several provisions that may affect the tax liability of individual taxpayers.  These provisions include increasing the individual tax rate, imposing a surcharge on high-income taxpayers, raising the capital gains and qualified dividend tax rate and subjecting trade or business income of high-income taxpayers to the net investment income tax (NIIT) and eliminating the Qualified Small Business Stock exclusion.   The proposal would raise the top marginal rate from 37% to 39.6% for married couples who report taxable income that exceeds $450,000 and for single taxpayers who report more than $400,000.  In addition, the proposal includes a 3% surcharge on modified adjusted gross income above $5 million for married taxpayers filing jointly and $2.5 million for married individuals filing separately.   The capital gains and qualified dividend tax rate would increase from 20 % to 25% for those taxpayers in the 39.6% tax bracket.  Currently trade and business income is not subject to the NIIT and a taxpayer in the highest bracket would pay a maximum rate of 37%.  However the BBBA proposes that the income earned by high income taxpayers actively participating in their business would be subject to the NIIT in addition to the increased income tax rate of 39.6% and the 3% high income surcharge. As a result a taxpayer in the proposed 39.6% income tax bracket may ultimately pay a maximum rate of 46.4%, an increase of almost 10%.

The proposal would also prevent taxpayers from contributing to their IRAs, if the value of their IRA and other retirement account balances exceed $10 million and their taxable income exceeds $450,000 for married couples or $400,000 for single filers. The BBBA is recommending that taxpayers would also be required to take required minimum distributions equal to 50% of the value of the account that exceeds $10M and 100% of the account over $20 million. The BBBA would also prohibit certain taxpayers from making nondeductible IRA contributions and then converting it to a ROTH IRA.  These provisions would apply to married taxpayers with income above $450,000 and $400,000 for single taxpayers.

Proposed Tax Provisions for Businesses

The BBBA and BIB may also bring significant changes to the tax provisions for some businesses.  These changes may include replacing the flat corporate tax rate of 21% with a graduated rate structure whereby the $400,000 of income would be subject to an 18% tax rate, with the 21% rate retained for income between $400,000 and $5,000,000. The graduated rate would increase to 26.5% for those businesses with income in excess of $5,000,000. The BBBA would also set permanent limits on excess business losses from pass-through entities and sole proprietors can use to offset ordinary income to $250,000 or $500,000 for married taxpayers filling jointly.

Proposed Estate Tax Provisions

Finally and most significant, the BBBA would change the gift and estate taxes and related planning strategies. The current lifetime estate tax exemption for 2021 is $11,700,000 and the BBBA would reduce the exemption to $5,000,000 in 2022.  This will have a significant impact on taxpayers with estates greater than $5,000,000.  Equally significant will be the treatment of grantor trusts outlined under the BBBA provisions.  Prior to the proposed BBBA, grantor trusts were excluded from a taxable estate if there was a completed gift for gift tax purposes or a sale to the grantor trust between the grantor taxpayer and the trust.  The BBBA proposal provides that if the taxpayer at their time of death is deemed the owner of the trust for income tax purposes, the assets of the trust would be includible in the decedent’s estate. Furthermore, a sale between a taxpayer and their grantor trust would be taxed as if the sale was between the taxpayer and a non-related party subjecting the sale to income tax where previously it was disregarded.

One of the long-standing planning tools estate planners were able to use were valuation discounts on family owned entities. The BBBA provides that taxpayers can no longer use discounts for gift and estate tax purposes on transfers of interests in entities that hold nonbusiness assets.