What’s Happening with the Budget Reconciliation Tax and Spending Bill

December 7, 2021 | Article

By Jay Heflin and Mel Schwarz, JD, CPA

On November 19, 2021, the House of Representatives passed the $1.75 trillion tax and spending reconciliation bill (named the “Build Back Better” reconciliation bill). The vote was 220-213.

The legislation is now in the Senate. Lawmakers in that chamber could begin floor action on it as soon as the week of December 13, 2021. A vote in the Senate on the bill could occur by the end of the month.

Here are the key tax provisions to be aware of in the House’s version of the bill.

Tax Increases on Individuals

  • Surcharges on High Income Taxpayers: 5% on modified adjusted gross income more than $10 million ($5 million for married filing separate and $200,000 for an estate or trust), plus an additional 3% on modified adjusted gross income in excess of $25 million ($12.5 million for married filing separate and $500,000 for an estate or trust).
  • Expansion of the Net Investment Income Tax: The legislation would eliminate the active owner exception on the Net Investment Income Tax for High Income Individuals. This would generally affect joint taxpayers with modified adjusted gross income between $500,000 and $600,000 (between $400,000 and $500,000 for single taxpayers, and between $250,000 and $300,000 for married filing separate). The change would also apply to the undistributed net investment income of estates and trusts.
  • Limitation on Excess Business Losses of Noncorporate Taxpayers: The excess business loss becomes a deduction subject to the following year’s limitation rather than becoming an net operating loss. Effective for tax years beginning after December 31, 2020.
  • State and local tax deductions: The $10,000 limitation on the deduction of state and local taxes would be increased to $80,000 ($40,000 for married filing separately, estates and trusts) for tax years beginning after 2020 and beginning before 2031.
  • Prohibiting Certain Roth IRA conversions, including both of the following:
    • The conversion of after-tax contributions in qualified plans and IRAs made or transferred after 2021.
    • The conversion of IRAs and employer-sponsored plans for married taxpayers with taxable income over $450,000 ($425,000 for heads of households and $400,000 for single and married taxpayers filing separate; all amounts to be indexed for inflation after 2028), effective after 2031.

Tax Increases on C Corporations

  • Establish a 15% corporate alternative minimum tax on corporations with a 3-year average adjusted pre-tax financial statement income in excess of $1 billion.
  • Apply a 1% excise tax to the repurchase of corporate stock, effective for repurchases of stock after 2021.
  • Repeal the special 75% and 100% exclusion rates for gains recognized on the sale of qualified small business corporation stock for taxpayers with adjusted gross income of $400,000 or more, effective for sales and exchanges after September 13, 2021. An exception for binding contracts that exist as of that date would apply if the sale occurs by the end of 2021.

Significant Tax Provisions Not in House-passed Bill

A number of significant tax provisions were discussed but are not in the House-passed Reconciliation Bill, including:

  • An increase in individual tax rates on ordinary income.
  • An increase in individual capital gains tax rates.
  • An increase in corporate tax rates.
  • Reduced corporate tax rates on first $400,000 of taxable income.
  • The early reduction in the unified credit for estate and gift taxes
  • Modifications in the use of grantor trusts and family partnerships for estate planning.
  • Bank reporting of depositor account flows.

A short summary of all the tax provisions included in the bill and their expected cost can be found here.

Next Steps for the Reconciliation Bill

The Senate is expected to make changes to the bill, including repealing the $10,000 SALT cap deduction for certain taxpayers with income above a specified amount. Senators have not agreed on the income level for the repeal, and it is not clear when a decision will be made on this issue.

Other tax changes could also be proposed.

If the Senate is successful in changing the bill, the House must approve those modifications before the legislation can be signed into law. This could be a time-consuming process.

When to Expect Final Passage of the Reconciliation Bill

It is not clear when final passage will occur. Currently, Democratic congressional leaders say that final passage will happen by the end of the year. Other lawmakers are skeptical of that timeline and think passage will occur in early 2022. There is also a possibility this legislation does not become law.

How could you be impacted by the reconciliation bill?

This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.

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