By Brandon Baiamonte, MS, CPA, CFE, CFM
Mission Wealth Director of Tax Strategy
Congress released its new version of tax law changes late last week. The new legislation is called the “2021 Build Back Better Act.” A lot of what we feared with the tax law changes appears to be off the table now. We’ll cover the major tax proposals as outlined in the legislation. More importantly, we’ll cover what ended up being taken out. We need to emphasize this isn’t final and changes will likely be made before the bill becomes law.
What is included?
- A tax surcharge of 5% on income over $10 million. The surcharge will likely apply to trusts with income above $200,000.
- An additional surcharge of 3% on income over $25 million. The additional surcharge will likely apply to trusts with income above $500,000.
- The qualified small business stock exclusion will be reduced from 100% to 50% for those with income above $400,000. There is also speculation this exclusion will no longer apply to QSBS held in a trust or estate. This changes MAY be made retroactive to September 2021.
- The 3.8% net investment income tax will apply to S-corporation earnings for single taxpayers with $400,000 of income and married joint taxpayers with $500k of income.
- The enhanced premium tax credit will be extended to 2025.
- The expanded child tax credit was extended for one more year.
President Biden was initially hoping for a $3.5 to $4 trillion infrastructure package. It looks like this package is being scaled back to around $1.75 trillion. This means a lot of the tax increases initially proposed won’t need to happen to fund the reduced amount. In addition, several moderate Democrats don’t want to see tax rates increased. This has led to the tax increases being watered down significantly from what President Biden first announced.
What isn't included?
- Tax rates will be unchanged. In other words, neither ordinary nor capital gains tax rates are going up.
- Virtually no changes will be made to the estate tax, including:
- The unified exemption amount of $11.7 million will be left alone. As a reminder, this is set to sunset and will be cut in about half in 2026.
- The step up in basis will still be allowed.
- There will be no changes made to the tax strategy surrounding grantor trusts including GRATs.
- The provision prohibiting accredited investments in retirement accounts (IRAs, etc.) is no longer in the bill.
- The provisions prohibiting backdoor Roth strategies are no longer in the bill. In other words, backdoor Roth strategies may still be a viable strategy going forward.
The bill does include a 15% corporate minimum tax as well as a 1% stock buyback tax. These provisions should only affect larger corporations.
The removal of the $10,000 state and local taxes (SALT) itemized deduction limitation is not in the draft bill; however, many experts believe it will be in the final bill. If this occurs, it is likely to only be for two or three years. It’s just too expensive to be made permanent.
How Mission Wealth Can Help
At Mission Wealth, our tax management services work with you to minimize your tax burdens. We help you explore the most cost-effective solutions to help cover a number of possibilities. We have no proprietary products to sell and no quotas to fill. We simply offer independent, objective advice that serves your best interests.
Our Tax Management Services Include:
- Estate Tax Reduction Strategies
- Annual Tax Management Review (for Integrated Wealth and Private Clients)
- Concentrated Stock Planning (Access to LPs)
- Integration & Coordination with CPA on Tax Savings Strategies
If you would like to learn more, please click here or complete the form below.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.