October 28, 2021
Earlier today, the White House released a new framework for the Build Back Better plan, followed by a preliminary draft of the bill from the House Rules Committee.
The proposal outlines a slimmed down, yet still ambitious, spending and tax plan that the White House hopes can gain sufficient Congressional support to pass into law. At the time of writing, the plan and its specific proposals’ political pathway remains uncertain, complicated by several complex, and rapidly evolving, Congressional dynamics.
Notably, the House Rules Committee text did not include several substantial tax changes that have long been proposed to fund spending, including: lowering of gift and estate tax exemption amounts; limitations on grantor trusts; increased corporate, income and capital gain tax rates; and provisions related to IRAs and Roth IRAs. Neither was the “Billionaire Income Tax” mentioned.
Instead, draft provisions pay for new spending with investments designed to support IRS enforcement and several new taxes, including:
- A 15% minimum tax on corporations with more than $1 billion in profits, 1% surcharge on corporate stock buybacks for public companies, and 15% global minimum tax
- An income surtax applying a 5% percent rate on modified adjusted gross income (AGI) over $10 million, and an additional 3% on modified AGI above $25 million. The income surtax thresholds are lower for trusts, applying a 5% surtax on modified AGI over $200,000, and an additional 3% surtax on modified AGI over $500,000
- An expansion of the 3.8% net investment income (NII) tax to business profits for material participants making over $400,000, joint filers over $500,000 and all trust and estates (regardless of income levels)
- Limitation of the qualified small business stock exclusion to 50% for most sales of QSBS after September 13, 2021
- Limitations on excess business losses of noncorporate taxpayers, including a no-carryover of disallowed losses
We continue to advise that it is far better to plan than predict, and the political environment suggests that no tax changes should be considered “off the table.” Negotiations in Congress are ongoing, and the bill’s ultimate fate could be impacted by a wide array of factors. Congressional scorekeepers have not scored the framework, and more tax revenue than proposed may be necessary. Additionally, we have yet to see the Senate’s version of the proposal. And while the $10,000 SALT cap was not addressed in the draft text, several Democratic lawmakers have indicated that they expect it would be in the legislation.
We do not conclude that omission of previous proposals from the framework implies that they will definitively be removed from future legislation.
Our advice continues to center on established best practices for building a plan to achieve your goals across a range of outcomes. If doing so is in line with your goals, consider utilizing your full estate tax exemption to transfer future appreciation out of your estate. This continues to be good advice, even if the exemption is not cut in half next year, as it is due to expire in 2026. Additionally, when gifting to trusts, ensure current and new trusts are drafted to reflect your goals and wishes while providing maximum flexibility. This may include naming a trust protector who may make certain changes to the trust should circumstances warrant, as well as determining that trustees have the appropriate discretion to adjust for changing circumstances.
We will continue to update clients as policy developments merit. To take advantage of current opportunities and prepare for change, we encourage you to schedule a meeting with your advisor.