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The Biden administration’s third draft of the Build Back Better Act includes some notable changes from previous proposals. Here’s a summary of what’s in and what’s out in the most recent proposal.

What’s In?

Tax Increases for High Income Individuals

Application of the Net Investment Income Tax (NIIT) to Trade or Business Income

Applies the 3.8% NIIT to income earned in the ordinary course of a trade or business if taxable income exceeds $400,000 (single) or $500,000 (married filing joint), as well as for trusts and estates.

Effective date: Taxable years beginning after December 31, 2021

Surcharge on High-Income Individuals, Trusts and Estates

Charges a 5% tax on Modified Adjusted Gross Incomes (MAGI) exceeding $10,000,000 (married filing joint), $5,000,000 (single), and $200,000 for trusts and estates. An additional 3% tax is added, for an 8% total, on MAGI above $25,000,000 (married filing joint), $12,500,000 (single), and $500,000 for trusts and estates.

Effective date: Taxable years beginning after December 31, 2021

Modification to Rules Relating to Retirement Plans

Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances

Prohibits Roth or traditional IRA contributions for those with income over $400,000 (single), $450,000 (married filing joint) and $425,000 (head of household) if it would cause the individual’s total value of all retirement accounts to exceed or further exceed $10,000,000 as of the end of the prior year.

Effective date: Taxable years beginning after December 31, 2028

Eliminate Backdoor Roth contributions

Eliminates the “backdoor” Roth strategy by prohibiting all after-tax contributions in qualified plans and IRAs from being converted to Roth regardless of income level.

Effective date: Taxable years beginning after December 31, 2021

Eliminate Roth conversions of IRAs and 401(k)s for those with income over $400,000 (single), $450,000 (married filing joint), and $425,000 (head of household).

Effective date: Distributions, transfers and contributions made in taxable years beginning after December 31, 2031

Increase in Required Minimum Distributions (RMD) for High-Income Taxpayers with Large Retirement Account Balances

Requires a 50% distribution of combined retirement account balances over $10 million for those with incomes over $400,000 (single), $450,000 (married filing joint) and $425,000 (head of household. If the total balance exceeds $20 million, distributions must start from Roth accounts until the total balance falls below $20 million or all Roth funds are distributed. From there, an individual can choose which accounts to distribute to satisfy the 50% rule above.

Effective date: Taxable years beginning after December 31, 2028

Corporate Tax Reforms

Corporate Alternative Minimum Tax

Imposes a 15% minimum tax on corporations with income exceeding $1 billion, applicable if the minimum tax exceeds regular tax for the year.

Effective date: Taxable years beginning after December 31, 2022

Excise Tax on Repurchase of Corporate Stock

Imposes a 1% excise tax on the value of company stock repurchased by a publicly traded U.S. corporation.

Effective date: Repurchases of stock after December 31, 2021

What’s Out?

Notable Proposed Changes from the Ways and Means Draft Released on September 13, 2021

Changes related to the:

  • Corporate tax rate, easing the proposed tax burden on corporate earnings.
  • Individual income tax rate, easing the proposed tax burden on individuals.
  • Long-term capital gains tax rate, leaving more to grow in your taxable investment portfolios and appreciated asset sales.
  • Estate and gift tax exclusion amount, relieving pressure to make significant gifts before year end to use up the current $11.7 million exemption.
  • Estate and gift tax treatment of grantor trusts, further relieving pressure on some of the most effective strategies to move assets out of your estate and reduce estate tax. Read more here in the Federal Estate Tax Changes section of our last quarterly update.
  • 199A Qualified Business Income deduction, retaining this tax break for small business owners.

In Summary

Remember that this is still just a proposal and certain items may be added back or taken out as negotiations continue. For example, prior proposed changes related estate and gift taxes, grantor trusts, or passive asset valuation discounts could get added back in if additional revenue is needed. Until the President signs the bill into law, nothing is final. We’ll continue to monitor the situation for updates and, more importantly, communicate how these changes might affect you.

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About Lion Street

Lion Street is a national network of elite firms and financial professionals serving high-net-worth, high-income and business-owner clients with sophisticated wealth management, life insurance, and financial planning solutions.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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