As many of you know, the Infrastructure bill passed the House last week in a late night Friday vote. It had already been passed by the Senate and now waits for President Biden to sign it into law. He’s scheduled to do that via a public signing ceremony on Monday, 11/15. Not much was included in that bill from a tax or personal finance perspective (tighter cryptocurrency reporting requirements was the biggie), so I won’t dive into the details. The full text, all 1,039 pages of it, can be found at the link above.
Next up on legislators’ plates are the Build Back Better Act, funding the government, and an increase or suspension of the debt limit. The Build Back Better Act is the latest iteration of the broader social spending plan and tax changes that I discussed back in September (here and here). Many of those provisions have changed. While they’re nowhere near set in stone at this point, I wanted to provide an update of what’s currently in and what’s currently out (hint: a lot more is out than is in). Full text of BBB as of 11/3/21 can be found here.
- Higher income tax rates – original plan was to increase the top rate from 37% to 39.6% and compress the tax brackets so that the top brackets begin at $400K Single / $450K Joint. This has been eliminated. If that stands, that means no need to accelerate any income into 2021 from 2022.
- Net Investment Income Tax (NIIT) changes – subjects pass through active income to the 3.8% NIIT. This is still included and basically means that businesses that became S-Corps to try to avoid paying FICA on the “profits” vs the salary, will now have to pay NIIT on those profits instead.
- Earned Income Credit (EIC) enhancements – remain
- Surtax on millionaire income – The 3% surtax on incomes over $5M has been changed to a 5% tax on incomes over $10M and and additional 3% on incomes over $25M.
- Higher capital gains tax rate – This has been eliminated. This means no need to intentionally realize capital gains to lock in today’s lower tax rate.
- Change in corporate tax rate – The reduction in rate for small business and the increase in rate for all other business has been eliminated. But, a new 15% corporate alternative minimum tax on large corporations is included and a new 1% tax on corporate stock buybacks is added.
- Changes to 199A Qualified Business Income (20% small business deduction) – This has been eliminated. All the complexity and current income caps would remain as-is.
- IRA / Roth IRA restrictions – these have remained though some have been delayed and one has been removed:
- Contributions to IRAs wouldn’t be allowed if the value of all your IRAs exceeds $10M and income exceeds $400k for the year.
- RMDs would be required for IRAs/Roths over $10M.
- The conversion of after-tax dollars from a Traditional IRA / 401k / 403b / etc, would be prohibited, effectively eliminating the Backdoor Roth and Mega-Backdoor Roth strategies. This would begin 1/1/22, which means the end of 2021 is the last chance to use these strategies. It may make sense for those who usually make IRA contributions at tax time for the previous year and then convert to their Roth (“backdoor Roth”) to do this by 12/31/21. It may also make sense to convert IRAs that have after-tax dollars mixed with pre-tax dollars even though this will generate some income in 2021 as it would be the last time to convert the after-tax portion.
- All Roth Conversions would be prohibited for high income taxpayers after 2031 (this one is a funding gimmick that would pull forward conversions into the 10-year period over which the bill is analyzed to determine its net cost).
- The restriction on private investments and those that could only be made by “accredited investors” has been eliminated in the latest bill.
- Reduction in the gift/estate tax exemption – This has been eliminated, meaning the currently scheduled reduction in 2026 remains. No need to scramble and try to gift away tens of millions of dollars in advance of a 2022 change.
- Changes to grantor trusts to pull them back into the estate of the grantor – This has been eliminated.
- SALT (state and local tax deduction) – the current $10k limit on deductions was unaltered in the original proposal. The new bill increases the deduction cap to $72,500, but also extends the cap which would have expired in 2025, to 2031. If this goes through, anyone who can delay property tax payments or state estimated tax payments to 2022 would be better of doing that than paying in 2021.
- Expanded Energy Tax Credits – still included
- Expanded Plug-In Electric Vehicle Credits – still included
- Extension of the 2021 enhanced child tax credit – still included
- Universal Pre-K – still included
- Credit for other dependents – eliminated
- Extension and permanence of the 2021 Dependent Care Credit – eliminated
- Caregiver’s credit – eliminated
- Paid family and medical leave – still out.
- Free community college – never made it in
- Elimination of basis “step up” at death – still not included.
- Elimination of the ability to borrow tax-free by pledging a securities portfolio – still not included
- Changes to the taxation of “carried interest” – still not included.
- “Billionaire’s Tax” – tax on unrealized capital gains of billionaires – still out
- Medicare dental and vision – never made it in
- Lower prescription drug prices – never made it in (though there’s talk of brining this back in the Senate)
Remember, all of this is in a high state of flux and nothing is certain at this point. The Senate is likely to produce its own version of Build Back Better and then the House and Senate versions need to be reconciled, voted on again, and signed by the president. Given the differences between the progressive and moderate sides of the Democratic party and the wholesale opposition by the Republican party, the odds of anything getting passed into law by the end of 2021 feel lower than 50%. In fact, current prediction markets are pricing the following for a law that passes by the end of 2021:
- a 30% chance that income taxes increase in any way (including the currently proposed surtax on millionaires),
- a 33% chance that the SALT deduction will be modified,
- a 13% chance of a “billionaire’s tax”
- a 10% chance of an increase in capital gains.
- a 6% chance of a corporate tax rate increase.
Not very promising odds, but that doesn’t mean that nothing will pass. It also doesn’t mean that the whole thing isn’t punted into 2022 and passed then.