Build Back Better Act (BBB) UPDATE!

If you missed our Nov. 12th update, you can read it here.

These are the latest updates as of today:

CORPORATE TAXES

A 15% minimum tax on corporate book income. This would only apply to corporations with that report at least 1 BILLION in book income to shareholders. Clearly , companies that could fit this tax profile are probably very large publicly traded nationally known corporations that have significant tax deductions and tax credits that could potentially reduce their taxes to much lower levels and even to zero in some cases.

IRS ENFORCEMENT

A huge increase in hiring of tens of thousands of new IRS agents to audit high earners, especially successful owners of S Corps and LLCs “pass-through” entities that have high incomes in excess of $400,000.

PERSONAL INCOME TAXES

A 5% surtax on adjusted gross incomes incomes above $10 million per year and an additional 3% surtax on adjusted gross incomes above $25 million per year
Closes a current loophole that allow certain “pass-through” business owner taxpayers (i.e. S Corp and LLC owners) to avoid paying the extra 3.8% Net Investment Income Tax (NIIT) on their K-1 “pass-through” profits. Under current law, the 3.8% NIIT surtax only applies to capital gains and dividends of certain high earning taxpayers and not to K-1 “pass-through” profits. If the new rule becomes law, it would apply to single filers earning more than $400,000 and married filers earning more than $500,000.
Increases the State and Local Tax (SALT) deduction limit from current $10,000 per year up to $ 80,000 per year through 2030. The cap would return to $10,000 for 2031 and then expire.

RETIREMENT PLANNING

Would impose an IRA contribution limit on high income taxpayers ($400,000 single and $450,000 married) who also have IRA account balances of $10 million and up. This provision would not start until after 12/31/2028.
Would impose extra Required Minimum Distributions (RMDs) on high income taxpayers who have IRA account balances of $10 million and up. This would force out as taxable income 50% of the excess above $10 million in the first year and the other 50% excess above $10 million in the following year. This would only apply to taxpayers whose income exceeds $400,000 single and $450,000 married. This provision would not start until after 12/31/2028.

As you can see, the House passed version of the BBB is very different than some of the proposals that were being discussed earlier this year. However, the most important considerations are the current tax income, estate, gift, and corporate tax provisions that are NOT in the House BBB Act and will probably not be included in the subsequent Senate bill (but no guarantees on this):

  • The 21% top corporate tax rate (C Corps) remains the law
  • Stepped up basis at death for capital assets (i.e. stocks, real estate, shares of a closely held business) included in the gross estate remains the law
  • The 12/31/2025 “sunset” of the current estate and gift tax exemptions remains the law (2022 exemption of $12.06 million single and $24.12 million married)
  • Valuation discounts for transfers (lifetime exemption gifts) of minority ownership interests and lack of marketability remains in place under the guidelines of Rev. Rul. 93-12
  • The “grantor trust” income and estate tax rules remain in place including “grantor ILITs”. Death benefits for “grantor ILITs” with future premiums due and death benefits for newly created “grantor ILITs” would remain estate tax free.
  • The $15,000 per donee gift tax annual exclusion remains the law ($16,000 gift tax annual exclusion in 2022)
  • The 40% top estate tax rate remains in place.
  • The 20% top capital gains tax rate remains the law (plus a potential 3.8% NIIT surtax on capital gains and dividends for certain high earners)
  • The 37% top income tax rate remains in place (plus a potential 3.8% NIIT surtax on capital gains and dividends for certain high earners)
  • The 20% deduction for K-1 “pass-through” profits of certain S Corp and LLC owners remains in place. This 20% deduction can reduce the top marginal tax rate on K-1 profits from 37% to 29.6% for high income S Corp and LLC owners.
  • Tax deferral of cash value growth, tax free withdrawals to basis (FIFO) and loans for non-MECs, and tax free death benefits for life insurance remains the law
  • Tax deferred growth and LIFO taxation of withdrawals for annuities remains in place
  • The indexed tax deductibility limits for IRAs and Qualified Retirement Plans (QRPs) remain in place.
  • Tax free benefits for standalone LTC products and LTC riders remains the law.