[Updated with latest developments] After several weeks of in-party bickering President Biden and Congressional Democrat leaders took the first big step in passing their massive spending bill, a.k.a the Build Back Better (BBB) Act.
By passing the bill in the House, and getting an actual bill documented, Democrats have now sent the bill to the Senate for final negotiation. Specific details will change as legislators work to reduce the cost and adjust tax provisions in order to pacify key party holdouts (Senators Manchin and Sinema).
All 50 Democrat votes will be needed in the Senate to pass the final bill, before it heads to the President for signature. You can see some of the tax provisions and new/extended payments in the sections below.
Note – The BBB bill is different to the recently passed and signed Infrastructure bill
Federal Income Tax Rates
The proposal includes provisions to raise the top marginal income tax rate to 39.6% (from 37%) for individuals making over $400,000 and married couples making over $450,000. That’s down from $523,600 and $628,300 under current law.
The proposal also calls for a 3% surtax on ultra-wealthy individuals and married couples with adjusted gross incomes above $5 million. In addition proposals include the removal of many incentives for estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.
[Update] Democrats are reportedly looking to fund their reconciliation bill without raising top-line tax rates on wealthy individuals and profitable corporations. They are instead considering imposing a corporate alternative minimum tax, creating a 15 percent minimum tax for multinationals’ overseas profits and curbing tax evasion by pumping up the IRS.
Capital Gains Tax
As expected the proposals call for an increase of the long-term capital-gains and dividends rate to 25% from 20%. This is less than what the Biden administration wanted and also excludes imposing “death” tax to heirs on unrealized asset gains.
What did raise some consternation is that if passed the capital-gains tax increase would be effective immediately, and retroactively applied even if the bill is passed at a later date.
IRA Limits and Mandatory Distributions
People with tax-advantaged retirement accounts (e.g. IRAs) worth over $10 million would no longer be able to contribute to those accounts and would face sharply higher mandatory distributions.
Health Care Premium Expansion
The plan has provisions to extend the already expanded Premium Tax Credit to reduce health insurance premiums for more than 9 million Americans and expand coverage to millions more of uninsured Americans who don’t have access to Medicaid.
Child Tax Credit Permanent Expansion
The new package calls for making the Child Tax Credit permanent. However there will likely only be funding for three to five years in the reduced spending package, while lowering income qualification thresholds meaning fewer families will qualify for the full credit.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) will be expanded for millions of Americans and essentially act as a tax cut for lower income Americans and their families.
Property Tax Deduction
The proposal released by the committee didn’t address the State and Local Tax Deduction (SALT) which was capped at $10,000 in 2017. But this may be revisited in future revisions given many progressive Democrats in high taxing states are pushing for the cap to be raised or removed entirely.
Corporate Tax Rates
The top Corporate tax rate will rise to 26.5% from 21%, which is better than the 28% rate that President Biden had wanted. The proposal would also change the current flat tax rate structure to a progressive one, so small business are not adversely impacted. It would work by imposing a 18% on the first $400,000 of income; 21% on income up to $5 million, and a rate of 26.5% on income thereafter.
Partnerships and S-Corp business owners may see the biggest changes, with caps being reintroduced that would limit the owners personal income tax deductions to $500,000 for joint filers, $400,000 for individuals and $250,000 for a married person filing a separate return.
Companies would also face higher taxes on their foreign income with the minimum tax would go up from 10.5% to 16.6%.
See the full House Ways and Means proposal here.