The Build Back Better legislation is progressing towards a vote in the House in the near future. The legislation has evolved and continues to be modified as it nears voting in the House. While it is expected that there will be more changes leading all the way up to voting, the most recent draft legislation has some impactful individual income tax provisions that are summarized below.
- Modifications to the Net Investment Income Tax: The net investment income tax currently applies an additional 3.8% tax on passive investment income; a few examples of common types of passive investment income includes interest, dividends, and capital gains. The most recent proposal expands this 3.8% additional tax to include active business income and income derived from the ordinary course of business for married taxpayers filing jointly with modified adjusted gross income of $500,000 or more ($400,000 for all other taxpayers).
- Surcharge Tax on High-Income Individuals, Estates, and Trusts: A new additional tax of 5% would be assessed on certain high-income individuals. The additional 5% tax would apply to income in excess of $10 million. Additionally, another 3% would be added to income in excess of $25 million. The income thresholds are half for married filing separately taxpayers. The same surcharge rates would apply for estates and trusts with modified adjusted gross income over $200,000 and $500,000 respectively. It is important to note that for this surcharge tax, modified adjusted gross income for individuals would be calculated before considering charitable and mortgage interest deductions.
- Qualified Small Business Stock Limitations: Currently high-income taxpayers can be eligible for up to 100% exclusion of gain on the sale of qualified small business stock (Section 1202). For sales after September 13, 2021, the gain exclusion would be limited to 50% for taxpayers with adjusted gross income in excess of $400,000.
- Excess Business Loss Limitation Reinstated: The CARES Act temporarily removed the limitation on excess business losses for tax years 2018, 2019, and 2020. The most recent proposal reinstates the disallowance of business deductions in excess of business income for amounts in excess of $500,000 for married taxpayers filing jointly ($250,000 for all other non-corporate taxpayers). The limitation would be made permanent and would be effective as of January 1, 2021. Additionally, excess business losses would no longer be carried forward as an NOL and would remain subjected to the limitation in future years.
- Increase in Investment in the IRS: Invest in the IRS with the intent to increase audits of high net worth individuals. Increased investment will be used to hire agents trained to pursue wealthy tax evaders, modernize outdated IRS technology, and invest more in taxpayer service.
- Modification to SALT Deduction Cap: The $10,000 cap will be increased to $80,000 through 2026 and return to $10,000 through 2031. It should also be noted that a modification to the SALT cap is also being discussed in the Senate. The potential Senate modification would remove the cap for taxpayers under a certain level of income; the income thresholds being discussed are $400,000 and $500,000. For taxpayers above the income threshold the $10,000 cap will apply.
The proposals currently remain very fluid as provisions in each continue to be modified, removed, or added back. Keep an eye out for updates as final legislation is written. Also, check out our latest article on International Tax Provisions for the Build Back Better Act.
For more information or guidance, please contact Anatoli Pilchtchikov or Michael Adam at 301.231.6200.