Tax Update: The Build Back Better Act

The Build Back Better Act was recently narrowed by President Biden.

u.s. capitol

On October 28, 2021, House Bill H.R. 5376 lowered the originally proposed $2.1 trillion tax increases to $1.85 trillion.  

Recently, the House of Representatives issued new draft legislative text. This text, amended further by the House Rules Committee on November 4, 2021, is expected to be taken up for further deliberation (along with increasing the debt ceiling before the new year) once the House returns from their week-long Thanksgiving recess.  

November 4, 2021 Updates

The November 4, 2021 update to the Act included additional proposals to raise revenue and provide relief for both local and state taxes. The proposals within the Act are targeted at taxpayers with higher incomes and are expected to raise around $637 billion from net taxes over the next 10 years.  

While the legislation continues to be subject to adjustment, there are some provisions that will drastically impact estate and trust planning. From an estate planning perspective, the items that have been excluded from the September 13, 2021 House Ways and Means Committee tax plan should receive the most attention:  

No Removal of Stepped-Up Basis

Currently, the Build Back Better Act contains no modifications to the estate and gift tax statutes. The attempted removal of stepped-up basis or deemed realization rules at death remain untouched as of November 4, 2021. 

No Reversion of Unified Credit

Originally, the House Ways and Means Committee tax plan provided for a reduction in the estate and gift tax unified credit, reverting it from $10 million ($11.7 million when indexed for inflation) to $5,000,000.

As of November 4, 2021, the Act states that – for taxpayers with incomes below $10 million ($11.7 million) – there will be no change to individual ordinary income tax rates. However, this amount will sunset after December 31, 2025. 

No Raising of Capital Gains or Personal Income

The provisions, which would have raised capital gains tax rates and personal income rates, do not appear anywhere in the current state of the Build Back Better Act. There will be no changes to individual capital gains or qualified dividend tax rates for taxpayers with income over $10 million, as well as no changes to individual income tax rates with income below $10 million.

No Change to Grantor Trust Rules

Originally, grantor trusts that were created on or after the enactment of the Build Back Better Act, as well as any amounts transferred to a pre-existing grantor trust, were included in the taxable estate of the grantor. These rules have not been included in the updated framework. 

A Change for High-Income Taxpayers

The Build Back Better Act includes a 5% surtax imposed on MAGI that have in excess of $10 million, as well as an additional 3% surtax if the MAGI exceed $25 million.

This new surtax would be imposed on non-corporate taxpayers such as individuals, estates, and trusts, specifically including all undistributed income from estates and trusts in excess of $200,000.00. This will become effective after December 31, 2021.  

Pittsburgh Estate Planning Attorneys

It is important to remember that there may be further changes to the Act in the coming days. With questions or for more information on what the Build Back Better Act means for you, contact attorney Frank Gustine at 724.776.8000 or via email at fgustine@lynchlaw-group.com.

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