As you may know, the Biden administration released the latest proposal of major tax legislation on October 28th as the Build Back Better Act. Many of the changes we saw in the September 13th tax proposal are gone such as the updated marginal tax rates, the maximum capital gains rate of 25%, and changes to estate tax rules, among others.
Some provisions will most likely change before the final bill passes, however we are providing a summary of key points of the latest proposed legislation. Please note, this is not an exhaustive list, instead our aim is to add clarity to issues that may impact you.
Proposed Income Tax Changes
- Application of the 3.8% Net Investment Income Tax (NIIT) to S-Corp and other active business entity pass through distributions for taxpayers with income higher than $400,000 (Individual) or $500,000 (Married Filing Jointly).
- For high-income taxpayers with modified Adjusted Gross Income (MAGI) exceeding $10 million, a 5% surtax will apply on all income and an additional 3% surtax on any MAGI over $25 million. This additional surtax is in addition to the existing 3.8% Net Investment Income Tax that would remain in place under the proposed law.
- The state and local tax (SALT) deduction limit would be raised from $10,000 (current law) to $80,000 for 2021 to 2030 and revert back to $10,000 in 2031.
Proposed Retirement Strategy Changes
- The strategy of making non-deductible IRA contributions and then converting them to a Roth IRA, or the “backdoor Roth”, appears to be on its way out starting in 2022.
- The proposal will also prevent savers from using the “mega backdoor Roth” strategy within 401k plans.
- Elimination of Roth conversions for Single filer taxpayers with taxable income over $400,000 and Married Filing Joint filers with taxable income over $450,000 beginning in 2032 (would not be effective for 10 years).
Proposed Tax Credit Changes
- Refundable Child Tax Credit of $3,000 per child (and $3,600 per child under 6) extended to 2022.
- Unless the credits are extended, the amount of the full tax credit will revert back to $2,000 in 2023.
- Adding or improving tax breaks for green energy and energy efficiency
We will continue to closely monitor this legislation as it works its way through Congress and provide updates. Only the increase in the SALT deduction limit is penciled to go into effect for 2021, otherwise the other tax changes are not expected to apply to the 2021 tax year.
Please do not hesitate to reach out to your RTD team with questions!