Updated Framework for the Build Back Better Act

By Sam Miller, CFA®, CFP®, CAIA®
Senior Investment Strategist

The most recent text of the Build Back Better Act was released on Thursday, October 28th. Over the course of six weeks of negotiations, the bill was significantly scaled back from the previous version we discussed in September, in an effort to secure the necessary votes for the bill’s passage. While the proposals still make good on the administration’s commitment to focus on high-income earners and corporations, several proposals did not survive. The following is intended to provide a quick summary of the latest plan’s most significant tax-related items:

Notably, the following items DID NOT make it into the final text

  • Increases to top ordinary income and cap gains tax brackets
  • Restrictions on Roth contributions or conversions
  • New RMDs on mega-sized IRAs
  • Reductions to estate and gift tax exemptions
  • Restrictions on the use of grantor trusts
  • Reinstatement of state and local tax deduction (SALT)
    • Note: it seems likely that eventually something will be included on this issue, as it will be extremely difficult to pass the bill in the House without at least a partial SALT reinstatement.

The tax increases that ARE in the bill mainly apply to specific high-income individuals

Expansion of the Net Investment Income Tax (NIIT)

  • S Corp profits for individuals earning over $400k would be subject to NIIT of 3.8%.

Creation of a surtax

  • MAGI over $10m would be subject to a new 5% surtax (additional 3% for MAGI over $25m)
  • By assessing the surtax on taxpayer AGI, the proposal eliminates the ability for taxpayers to utilize charitable donations or other ‘below-the-line’ deductions to avoid the additional tax
  • The White House estimates that this surtax would generate $230 billion in revenue over 10 years. This raises a similar amount as the previously proposed 3% surtax and the increase in the top marginal rate to 39.6%, but concentrates the burden on higher income individuals.

Limitation of Section 1202 Stock Exclusion

  • The 75% and 100% Section 1202 special exclusion rates for qualified small business stock would no longer exist for taxpayers with AGI of $400,000 or higher (or for trusts and estates).

Extension of the expanded Child Tax Credit

  • Importantly, the credit would be extended only one year (through 2022) under the framework. It’s a popular policy on both sides of the aisle and may end being a mid-term election issue.

Corporate tax reform

15% Corporate Minimum Tax

  • All corporations earning more than $1 billion a year in profits would be subject to a minimum tax of 15%.
  • The tax would be assessed on book income (rather than taxable income) and would eliminate opportunities for corporations to reduce taxable earnings each year as a means of avoiding income tax.
  • Despite the news that a higher corporate tax rate had become less likely, the new ‘minimum tax’ framework should result in an estimated $800 billion increase in corporate taxes. This implies that the average U.S. company would pay about 20% more in taxes—disproportionately impacting U.S. multinationals.

Increased Foreign Tax Rates

  • The White House has proposed an increase in the global minimum tax rate to 15%, along with shifts to a ‘country-by-country’ system to prevent corporations from being able to take advantage of lesser ‘blended’ tax rates.
  • President Biden’s administration is seeking to establish a form of the corporate minimum tax (which has already been agreed to by several countries). It’s designed to help reduce the benefit of a multinational company relocating its headquarters to a foreign country in response to the increase in the global minimum tax rate.

Tax Stock Buybacks

  • A company that buys back its own stock would be taxed in the same manner as corporate dividends. In addition, buybacks would face a new excise tax of 1%.

While this framework represents an important step and clarifies several open issues, further changes are likely before the process is finally over. We will continue to monitor the legislative process and communicate with you as further developments unfold over the coming weeks. Please reach out to your SEIA advisor if you have any questions about how any of these proposed tax changes might impact your financial plan or portfolio.

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