Watered-Down Build Back Better (BBB) For High-Income Taxpayers

After months of negotiations, the Democratic-led House of Representatives advanced the Build Back Better (BBB) Act to the Senate.

The table below shows how the tax provisions have evolved since September. Many of the most controversial tax increase provisions were removed or watered down significantly. However, the spending and tax provisions of the BBB are both expected to continue to evolve in the Senate.

  DRAFT Build Back Better Act
in September 2021
Build Back Better Act, as passed by the House
in November 2021
Individual income tax rates Raise highest individual income tax rate to 39.6% Removed
Capital gains tax rate Raise long-term capital gains tax rate to 25% Removed
Net investment income tax (NIIT) Apply the 3.8% NIIT to trade or business income (i.e., K-1 income) for taxpayers with adjusted gross income (AGI)>$400,000 Remains in the Build Back Better Act
Surcharge on ultra high-income earners Apply a 3% surcharge on taxpayers with AGI >$400,000 Apply a 5% surcharge on income >$10,000,000 and an additional 3% on >$25,000,000
State and local tax deduction No change to the state and local tax deduction For years starting after 2020, the limitation for the state and local tax deduction increased to $80,000 through 2030
Lifetime federal Estate tax exemption Decrease of $11.7M estate tax exemption Removed
Grantor trusts Changes to grantor trust rules that would have adversely impacted estate planning Removed
Required minimum distributions from large IRAs At certain income thresholds with IRA balances >$10,000,000, a required minimum distribution of 50% of the amount above $10,000,000 and 100% of the amount >$20,000,000 Remains in the Build Back Better Act
Roth IRA Conversions At certain income thresholds, starting in 2032, Roth conversions are prohibited from traditional IRAs or certain employer-sponsored plans. Remains in the Build Back Better Act
Qualified small business stock deduction At certain income levels, elimination of the 75% and 100% capital gain deduction for qualified small business stock Remains in the Build Back Better Act

The initial draft legislation would have had a large tax impact on wealthy and high-income taxpayers. Some most impactful provisions included in the original proposal were the following:

  1. An earlier than scheduled 50% reduction to the estate and gift tax exclusion amount and the generation-skipping transfer tax exemption;
  2. Fundamental changes to the grantor trust rules, which would have resulted in gain recognition on previously tax-free transactions and the application of the estate and gift taxes to assets held in and distributed from grantor trusts covered by the post-enactment rules;
  3. The elimination of traditional valuation discounts that are often utilized when valuing an interest in an entity that holds non-business assets;
  4. The imposition of investment restrictions on IRAs that would prevent retirement accounts from holding certain assets, such as private placement investments and investments in entities in which the account holder owns substantial interests either directly or constructively;
  5. The increase in the top marginal rate on ordinary income; and
  6. The increase in the top long-term capital gains rate for taxpayers in the highest ordinary income tax bracket.

All of the above tax raisers were dropped (probably to make it more palatable to key Senate Democrats). If the Senate does not take up the vote in December, the reconciliation process will start over again.  So December should be an interesting month to see how the tax changes evolve (or not). Stay tuned!

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