{"id":1618,"date":"2021-10-18T05:04:00","date_gmt":"2021-10-18T09:04:00","guid":{"rendered":"https:\/\/actec.matrixdev.net\/?post_type=capital-letter&p=1618"},"modified":"2024-01-18T16:55:57","modified_gmt":"2024-01-18T21:55:57","slug":"ways-and-means-committees-build-back-better-act","status":"publish","type":"capital-letter","link":"https:\/\/actec.matrixdev.net\/capital-letter\/ways-and-means-committees-build-back-better-act\/","title":{"rendered":"Ways and Means Committee’s “Build Back Better Act”"},"content":{"rendered":"\n

The House Ways and Means Committee has taken a widely discussed (and in many respects exasperating) step to foretell the tax legislation we might see this year.<\/strong>
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Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

On August 24, 2021, pursuant to the Congressional Budget Act of 1974, as amended (2 U.S.C. \u00a7621 et seq.), the House of Representatives agreed to the Senate-approved Concurrent Resolution on the Budget for Fiscal Year 2022 (S. Con. Res. 14). The resolution set spending priorities of about $3.5 trillion for fiscal year 2022, which began October 1, 2021, and ends September 30, 2022. The votes were strictly partisan. In the Senate on August 11 the vote was 50-49, with all Democrats in favor and all Republicans opposed except Senator Mike Rounds (R-SD), who did not vote. In the House on August 24 the vote was 220-212, with all Democrats in favor and all Republicans opposed. The resolution left the House Ways and Means Committee and the Senate Finance Committee with flexibility to develop tax changes to pay for the contemplated expenditures.<\/p>\n\n\n\n

WAYS AND MEANS COMMITTEE ACTION<\/h2>\n\n\n\n

On September 15, 2021, the House Ways and Means Committee approved the \u201cBuild Back Better Act\u201d (H.R. 5376), a package of tax changes pursuant to the budget resolution. Only one Democratic member of the Committee, Rep. Stephanie Murphy (D-FL), joined all the Republicans in voting against it. The bill now is headed to the House floor, while we wait for a corresponding consideration of revenue proposals by the Senate Finance Committee.<\/p>\n\n\n\n

The Ways and Means Committee bill does not include the proposals discussed in Capital Letter Number 52<\/a> that would treat gifts and transfers at death as gain realization events. This Capital Letter is a summary and analysis of just a few of the things the bill does include.<\/p>\n\n\n\n

EARLY SUNSET FOR DOUBLED BASIC EXCLUSION AMOUNT<\/h2>\n\n\n\n

The sunset of the 2017 Tax Act\u2019s doubling of the $5 million basic exclusion amount (indexed for inflation since 2012) would be accelerated from January 1, 2026, to January 1, 2022. Thus, the basic exclusion amount would return to $5 million, indexed for inflation since 2012, which the Joint Committee on Taxation (JCT) staff projects would be $6,020,000 for 2022. This is estimated to raise $54 billion over 10 years (mostly in the first five years before the original 2026 sunset). Obviously, the potential acceleration of the sunset has prompted acceleration of planning to use the increase in the basic exclusion amount before it sunsets. <\/p>\n\n\n\n

A SAMPLING OF THE INCOME TAX PROPOSALS<\/h2>\n\n\n\n

Corporate Income Tax Rates<\/h3>\n\n\n\n

Beginning January 1, 2022, the 21 percent corporate income tax rate would be retained for taxable income from $400,000 to $5 million, but it would be lowered to 18 percent on the first $400,000 of taxable income and raised to 26.5 percent on the amount of taxable income in excess of $5 million. This is estimated to raise $540 billion over 10 years.<\/p>\n\n\n\n

Individual Income Tax Rates<\/h3>\n\n\n\n

Beginning January 1, 2022, the 39.6 percent top individual income tax rate, suspended for eight years by the 2017 Tax Act, would be reinstated for taxable incomes over $400,000 ($450,000 for joint returns and surviving spouses) and $12,500 indexed for trusts and estates. That amount is projected by the JCT staff to be $13,450 in 2022. In addition, a 3 percent surcharge would be applied to \u201cmodified adjusted gross income\u201d over $5 million for individuals and $100,000 for trusts and estates. For this purpose, \u201cmodified adjusted gross income\u201d is defined as adjusted gross income (AGI) minus any investment interest not deducted in determining AGI (in other words, deducted \u201cbelow the line\u201d).<\/p>\n\n\n\n

The rate of income tax on capital gains would be increased from 20 percent to 25 percent to the extent the taxpayer is subject to the reinstated 39.6 percent top rate \u2013 that is, for taxable incomes over $400,000 ($450,000 for joint returns and surviving spouses and $12,500 indexed for trusts and estates). Notably, this provision was designed to take effect on September 14, 2021, with an exception for gains recognized in 2021 pursuant to written binding contracts entered into before September 14, 2021.<\/p>\n\n\n\n

These changes are estimated to raise $421 billion over 10 years.<\/p>\n\n\n\n

Expansion of Tax on Net Investment Income<\/h3>\n\n\n\n

Beginning January 1, 2022, the 3.8 percent tax on net investment income would be expanded by effectively eliminating the \u201ctrade or business\u201d exception in section 1411(c)(1)(A) for individuals with \u201cmodified adjusted gross income\u201d over $400,000 ($500,000 for joint returns and surviving spouses) and for trusts and estates with adjusted gross income in excess of the threshold for the highest income tax bracket for trusts and estates (projected by the JCT staff to be $13,450 in 2022). In this case, unlike the 3 percent surcharge, \u201cmodified adjusted gross income\u201d is already defined in section 1411(d) as AGI plus, in effect, net foreign earned income excluded under section 911. This cutback of the trade or business exception is estimated to raise $252 billion over 10 years.<\/p>\n\n\n\n

Among other things, with its application to trusts at a level of only $13,450, this provision, if enacted, would essentially render moot the issue of how a trust or estate satisfies the \u201cmaterial participation\u201d test of section 469, which determines eligibility for the \u201ctrade or business\u201d exception.<\/p>\n\n\n\n

Limitation of Qualified Business Income Deduction<\/h3>\n\n\n\n

Beginning January 1, 2022, the complicated qualified business income deduction of section 199A (added by the 2017 Tax Act) would be capped at $400,000 for individuals ($500,000 for joint returns and surviving spouses) and $10,000 for trusts and estates. This is estimated to raise $78 billion over 10 years, mostly in the first five years before 2026 when section 199A is scheduled to sunset anyway.<\/p>\n\n\n\n

The Effect on Trusts<\/h3>\n\n\n\n

The cumulative effects of a 3.6 percent increase in the income tax rate, a 5 percent increase in the tax on capital gains, and the elimination of the trade or business exception for purposes of the 3.8 percent tax on net investment income, all in the bracket over $13,450, plus the 3 percent surcharge on modified adjusted gross income over $100,000 and the $10,000 cap on the qualified business income deduction, would be very severe for trusts. That would be particularly true for non-grantor trusts that accumulate income. And making it a grantor trust offers no relief after the grantor has died. Or even while the grantor is alive, a subject to which we now turn.<\/p>\n\n\n\n

DRAMATIC CHANGES FOR GRANTOR TRUSTS<\/h2>\n\n\n\n

Closer Alignment of Grantor Trust and Transfer Tax Rules<\/h3>\n\n\n\n

The bill approved by the Ways and Means Committee would create a new chapter 16, consisting solely of a new section 2901, effectively linking the grantor trust rules and the transfer tax rules so that a trust designed as a grantor trust would continue to be exposed to gift or estate tax with respect to the grantor. Thus the bill picks up, with some significant changes, the proposals in section 8 of Senator Sanders\u2019 \u201cFor the 99.5 Percent Act\u201d (S. 994), which in turn track the Obama Administration annual revenue proposals (\u201cGreenbooks\u201d). For detailed discussion of the \u201cFor the 99.5 Percent Act,\u201d see Part 1.b of Washington Update<\/a>, available at http:\/\/www.bessemertrust.com\/for-professional-partners\/advisor-insights<\/a>.<\/p>\n\n\n\n

With respect to a trust or portion of a trust that is not otherwise includable in the grantor\u2019s gross estate, section 2901 would:<\/p>\n\n\n\n