Tax Concerns as a Result of the Infrastructure Investment and Jobs Act and Other Legislation

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Tax Concerns as a Result of the Infrastructure Investment and Jobs Act and the Build Back Better Act

As we approach the end of the year, recent legislation can impact your tax and wealth management plans. We have reviewed the final Infrastructure and Jobs act as well as the latest proposal of the Build Back Better Act. It is important to keep in mind that the Build Back Better Act has not yet been signed into law and revisions will likely be made. The following is our takeaway of impacts to individuals.

Infrastructure Investment and Jobs Act

At the end of November, President Biden signed into law a $1.2 trillion bipartisan infrastructure plan, known as the Infrastructure Investment and Jobs Act. This plan includes funding for roads, bridges, railroads, airports, public transportation, access to broadband internet, and clean water. Congress plans to pay for this act by repurposing COVID-19 relief funds and unused unemployment benefits, delaying a Medicare rebate, and enacting stronger cryptocurrency reporting requirements. This newly enacted law will likely not have a significant impact on your estate plan.

Build Back Better Act

The Build Back Better Act is the proposed $1.75 trillion reconciliation package which includes provisions to combat climate change, increased funding for family care, and expansions to Medicare. The original $3.5 trillion version of this bill included several significant changes to estate tax, gift tax, generation skipping transfer tax, and grantor trust legislation. After months of negotiations, many of these provisions were removed. However, the current version of the bill does include a few key provisions that could impact your business and estate planning preparation.

Individuals

  • Surtax on High Income Taxpayers: A 5% rate would apply to modified adjusted gross income (AGI) in excess of $10 million, and an additional 3% surtax would be imposed on income above $25 million. For taxpayers who are married filing separately, the 5% rate would be imposed on AGI over $5 million, and the 3% rate would apply to AGI over $12.5 million.
  • Net Investment Income Tax to Trade or Business Income: Under current law, trade or business income earned by an individual that materially participates in a business is not subject to the 3.8% tax on net investment income (NII).  Generally, someone materially participates in the business if they spend 500 hours or more per year on that business. This tax applies to investment income from interest, dividends, and capital gains. The most recent version of the bill would eliminate this exception, meaning all trade or business income would be subject to the 3.8% tax. Net operating losses would no longer be accounted for in determining NII.  This tax would apply to taxpayers earning more than $400,000 annually or $500,000 for married taxpayers filing jointly.
  • Limit Individual Retirement Accounts: Contributions to IRAs would be limited when balances reach $10 million, and the required minimum distributions for those accounts would be accelerated.
  • Raised Cap on State and Local Tax Deductions:        The cap on deductions for state and local taxes would be raised from $10,000 to $80,000 for 2021-2030.

Trusts

  • Surtax on Non-Grantor Trusts: A 5% rate would apply to the AGI of non-grantor trusts in excess of $200,000 and an additional 3% tax would apply to the AGI of a non-grantor trust in excess of $500,000. This is similar to the surtax imposed on individuals, but the threshold at which the tax applies to trusts is much lower than the threshold for individual income. This lower threshold may create an incentive to make larger distributions to trust beneficiaries.
  • Net Investment Income Tax to Trade or Business Income: Under current law, trade or business income earned by a non-grantor trust that materially participates in a business is not subject to the 3.8% tax on NII. The most recent version of the bill would eliminate this exception, and the NII tax would apply to trust income over a low threshold.  Currently the threshold is $13,050 subject to adjustments for inflation.        

Corporations

  • Surcharge on Corporate Stock Buybacks: A 1% excise tax would be imposed on US corporations based on the value of the repurchased stock.
  • Corporate Alternative Minimum Tax: A 15% alternative minimum tax would be imposed on corporations which report $1 Billion or more in profits to its shareholders.
  • Minimum Foreign Corporate Profits Tax- A 15% tax would be imposed under the Global Intangible Low-Taxed Income (GILTI) regime. 136 countries have agreed to a minimum tax on foreign corporate profits. US corporations based in one of the countries that have not agreed to the minimum tax would pay a penalty rate instead. Other changes to the GILTI regime include reducing the foreign tax credit to 5%, reducing the Qualified Business Asset Investment deduction to 5%, and including foreign oil and gas extraction income. Additionally, the Foreign-Derived Intangible Income deduction would be reduced, resulting in a 15.8% tax rate.   
  • Pass-Through Business Tax: The 2017 Tax Cuts and Jobs Act temporarily limited the deductibility of business losses for pass-through entities.  Under the Build Back Better Act, these limitations would be made permanent.        

Research provided by Ty Stradling.