Update – Proposed Tax Law Changes

Take-Away: With the ‘trimmed down’ $1.75 trillion Build Back Better Framework proposed legislation, some of the earlier tax law changes have disappeared, to be replaced by new proposals. (Did I just written a ‘trimmed down’ $1.75 trillion?)

Background:  On October 29, 2021, the President announced a $1.75 trillion Build Back Better Framework Act. In order to pay for that proposed legislation, several new revenue generating changes were proposed to the Tax Code. Yet, in that proposal, several other tax law changes the President had advocated over the past several months did not make the ‘final cut.’

A short summary of ‘what’s in’ and ‘what’s out’ follow. Keep in mind that these are proposals only, and what may appear to be ‘out’ could reappear when the final legislation is finally enacted.

What’s In: The following revenue sources are ‘new’ from what the President earlier advocated, or a change in amount of an earlier proposal:

New Income Surtax: This change would impact roughly 0.02% of Americans. It would apply a 5% surtax on an individual’s annual income above $10.0 million. An additional 3% surtax would be on annual income above $25.0 million. These two surtaxes, if enacted, would generate up to $230 billion over the next 10 years.

Medicare Surtax: This change would broaden the scope of taxpayers who would be subject to the 3.8% net investment income tax. [IRC 1411.] This tax would apply to the owners of businesses of ‘pass-through’ entities like LLCs and partnerships. The mechanics of how this change would be implemented still need to be worked out. If enacted, this change is estimated to generate $250 billion over the next 10 years.

Stock Buy-Back Surtax: A new 1% tax would be imposed on corporations that implement a buy-back of their own stock. In effect, the funds used to implement the buy-back would be taxed as a corporate dividend.

Curtailment of Tax Loss Deductions: A change to the Tax Code would permanently disallow business losses in excess of business income for non-corporate taxpayers. In addition, it would make excess business losses for one year subject to a limitation on their use for the next year. This change, if enacted would generate $170 billion over the next 10 years.

Minimum Corporate Income Tax: A minimum 15% corporate income tax would be imposed. This change, if enacted, would generate $325 billion over the next 10 years.

Tax on Multinational Corporations:  This proposal would raise the  income tax rate by 15% on what U.S. multinational corporations pay on their foreign profits. This change, if enacted, would generate $350 billion over the next 10 years.

IRS: A perceived future source of revenue is by the government allocating more resources to the IRS. It is claimed that with a renewed major enforcement of the tax laws (new and existing) an additional $400 billion would be generated over the next 10 years.

What’s Missing: Several tax law changes that the President pushed over the past several months that did not appear in his October 29 proposal include the following:

1. Raising the corporate income tax rate;
2. Taxing unrealized capital gains, i.e. deemed dispositions;
3. Cutting an individual’s transfer tax applicable exclusion amount by 50%;
4. Taxing (essentially eliminating) grantortrusts;
5.  Eliminating valuation discounts for non-business entities;
6. Requiring banks and other financial institutions to report account balances annually to the IRS; 
7. Eliminating ‘back-door’ Roth IRAs and Mega-Roth IRAs;
8. Eliminating contributions to IRAs for individuals who earn $400,000 (single) $450,000 (married) if they have more than $10 million in their IRA.
9. Mandating distributions from ‘jumbo’ IRAs, i.e. a required withdrawal of 50% above $10 million in an IRA, regardless of age.

Programs previously pushed by the President that are dropped from the proposed bill are: (i) paid family leave; and (ii) free community college.

Conclusion: Like much of what has been written over the past 6 months, these are only proposals, many or none of which may never become law. Stay tuned as Congress is supposed to finalize its negotiations this week.