Build Back Better – The State of the State

For nearly a year, congress has debated various proposals and “frameworks” as they relate to changes in federal taxes, estate and gift tax laws, and retirement plans. Proposed changes have come and gone, and while nothing is certain yet, the most recent iteration is a vastly skinny’d down version that removes a lot of the changes that would have significant impact to our clients.

In this article we are going to focus on the “pay-fors” in the new slimmer version of the expected bill. most recent proposal outlined by President Biden on October 30th. We can almost guarantee that we have not reached final negotiations, so stay tuned for additional updates.

Taxes

Noticeably absent from the current version of the bill were the following provisions included in earlier versions (with the exception of multimillionaires subject to the propose surtax mentioned below).

Now Removed:

Increase the top ordinary income rate from 37.0% to 39.6%
Increase the top capital gains tax rate to 25% for individuals earning under $10MM
Expansion of the 3.8% Net Investment Income Tax (NIIT)
Changes to the gain exclusions for Qualified Small Business Stock (QSBS)
SALT cap repeal

What remains in the bill is the “Billionaire Tax.” This would be a 5% surtax on modified adjusted gross income of more than $10 million, and an additional 3% (or, a total 8% surtax) on income of more than $25 million, according to a summary of provisions released Thursday, October 28th.

However, the proposed “Billionaire Tax” has sparked a Constitutional debate among strategists. Some experts suggest that based on Constitutional Law, a census capitalization would be required for a wealth tax, rendering a very different taxation in sparsely versus densely populated states, resulting in a billionaire in Omaha paying a different tax than one in New York. This creates a challenge among various law makers and their constituents.

This tax also likely qualifies as a “direct tax,” which has specific meaning in constitutional law relating to taxes on property “by reason of ownership.” The 16th Amendment to the U.S. Constitution defines “taxes on income” and not taxes on wealth. The right to tax wealth is reserved for state and local governments (i.e. property tax). Even if this tax were to make it into the bill, many experts believe it would not likely survive court challenges. We believe this billionaire tax is dead on arrival.

Estate Planning

Several impactful provisions that applied to “grantor trusts” have also been removed from the most recent proposal for the Build Back Better Act. Specifically, we don’t see mention of the following provisions.

Now Removed:

Changes to Gift/ estate and GST lifetime exemptions. These are slated to sunset in 2026 anyway, and Congress appears to have lost the appetite to debate this topic at the present time.
Rules for new grantor trusts that would disallow the use of these trustsm to move assets out of a grantor’s estate. (Either way, existing grantor trusts would still be out of the grantor’s estate)
Stepped-up Basis: no mention of removing this tax benefit at death, in the latest version.

Retirement Planning

Almost all of the retirement- related provisions that would have helped pay for the bill now appear to have been dropped:

The elimination of Roth IRA conversions to Traditional IRA and the co-called “back-door” Roth IRA contributions.
Elimination of Mega backdoor ROTHs (however, only 1 in 5 401(K) plans allow for this strategy).
New RMD rules for aggregate retirement accounts in excess of $10MM have been cut from the bill.

It is not unheard of for Congress to reinsert previously drafted proposed legislation into bills in the waning hours before legislation is put to an actual vote. We will continue to monitor the legislative process and provide updates as we learn more.

Once a final bill has been approved, we will provide a summary that includes the details on the programs, and the intended way to pay for them.