On November 5, the House passed the $1 trillion bipartisan infrastructure bill, which was previously passed by the Senate and is now heading to President Biden’s desk for signature. Washington’s attention will now turn to the “Build Back Better” legislation, which contains numerous tax provisions. This alert summarizes certain tax provisions of this legislation that are most relevant to our clients.
- Surcharge of 5% on modified adjusted gross income exceeding $10 million for an individual, $5 million for a married individual filing separately, and $200,000 for an estate or trust. An additional 3% surcharge on modified adjusted gross income exceeding $25 million for an individual, $12.5 million for a married individual filing separately and $500,000 for an estate or trust. The amendments would be effective for taxable years beginning after December 31, 2021.
- Increase the cap on individual deductions for state and local taxes from $10,000 to $80,000 for a joint return for taxable years beginning after Dec. 31, 2020, and before January 1, 2031. This would apply to taxable years beginning after December 31, 2020.
- Prohibit so-called “Backdoor Roth” conversions for taxpayers with a modified adjusted gross income of $450,000 or more in the case of an individual who is married filing jointly; $425,000 or more in the case of an individual who is a head of household and $400,000 or more in the case of an individual who does not fall into the previous two categories. This amendment would take effect for tax years beginning after December 31, 2031. Typically, the Roth IRA is available only to taxpayers whose annual income is below certain levels. With the “Backdoor Roth,” higher income taxpayers are able to convert savings held in a traditional IRA into a Roth IRA.
- Require a minimum distribution for retirement accounts of more than $10 million and prohibit additional contributions to the retirement accounts of more than $10 million. The amendments would apply to taxable years beginning after December 31, 2028.
- Portfolio interest exclusion from U.S. withholding tax on interest would not include interest received by any person who owns at least 10% of either the total voting power or total value of a corporation. Currently, this exclusion only applies to persons owning 10% of the total voting power of a corporation. This amendment would apply to obligations issued after the date of the enactment of the proposed act.
- Payments made pursuant to a specified notional principal contract (e.g., a total return swap) that are determined by reference to income or gain in respect of an interest in a publicly traded partnership (that is not treated as a corporation) would be treated as a dividend equivalent and therefore subject to a 30% U.S. withholding tax for foreign persons for any payments made after December 31, 2022.
- Net investment income tax (i.e., the Obamacare tax) would apply to the greater of specified net income or net investment income for high-income individuals whose modified adjusted gross income exceeds $500,000 for married individuals filing jointly, $250,000 for married individuals filing separately. “Specified net income” includes net investment income derived in the ordinary course of a trade or business. This would effectively eliminate the limited partner exemption utilized by many fund managers structured as limited partnerships. The amendments would apply to taxable years beginning after December 31, 2021.
- Income exclusion would no longer apply for capital gains from certain small business stock (QSBS stock) for taxpayers with adjusted gross income equal to or exceeding $400,000, and for trusts or estates. This amendment would apply to a sale or exchange which is made pursuant to a written binding contract entered into after September 13, 2021.
- Add digital assets (such as cryptocurrencies) to the definition of “appreciated financial position” under Section 1259(b) (relating to constructive sales), which amendment would be applicable to contracts entered into after the date of the enactment of the proposed act.
- Expand the assets covered by the wash sales rule under Section 1091 to include foreign currency, commodity, and cryptocurrency, among others, for sales, dispositions, and terminations after December 31, 2021.
- Limitation on excess business losses for noncorporate taxpayers (currently scheduled to expire in 2026) would become permanent for taxable years beginning after December 31, 2020.
- For tax years beginning after Dec. 31, 2022, an alternative minimum tax of 15% would apply to domestic corporations with at least $1 billion of average annual financial statement income and foreign-parented domestic corporations with at least $100 million of average annual income for any three taxable years.
- 1% excise tax of the fair market value on repurchase of corporate stock exceeding $1 million, including the acquisition of the corporation’s stock by certain affiliates of the corporation. This would apply to repurchases of stock after December 31, 2021.
- Delay the effective date of mandatory capitalization of research and experimental expenditures from the taxable years beginning after December 31, 2021 to after December 31, 2025. This would be effective upon the date of the enactment of the proposed act.
- The latest version does not include several provisions that had been previously proposed: (i) changes to the carried interest rules; (ii) general increase in corporate tax rate and capital gains rate; (iii) decrease of the $11.7 million exemption from gift and estate tax; (iv) re-establishment of 39.6% individual income tax rate bracket, and (v) new section that negates the estate tax benefits of irrevocable grantor trusts by including the value of the trust assets in the grantor’s estate, treating trust distributions during the grantor’s lifetime to anyone (other the grantor or the spouse) as a gift and treating the transfer of the trust assets as by gift if grantor trust status ends during the grantor’s life time.
For additional information on recent income tax changes, please contact Ronald P. Cima (212-574-1471), Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Daniel C. Murphy (212-574-1210), Brett R. Cotler (212-574-1269), or Ashley Lin (212-574-1374).