Reconciliation bill

There are two bills moving through Congress. The first is the $1.2 trillion bipartisan infrastructure bill, which has passed the Senate and contains only very modest tax changes (see our previous tax alert). It remains held up in the House, as some progressive congressional members are withholding support while they negotiate for a larger $3.5 trillion “human” infrastructure reconciliation package, officially known as the Build Back Better Act, to also be passed by the Senate. This has effectually linked the two bills, at least for the time being. The future of the bipartisan infrastructure bill likely depends on the success of the Build Back Better Act, which can only pass via the reconciliation process.

The tax components of the Build Back Better package cleared the Ways and Means Committee in September and await action on the House floor. It is increasingly looking like the Senate will not produce its own version of the bill, but rather negotiate the final package with the House and any changes (such as a state and local tax cap modification or limitations on estate “step-ups”) would be incorporated through amendments on the House floor before the final package is sent to the Senate for consideration.

The current Ways and Means bill, which includes a majority of President Biden’s priorities, is likely to be the initial framework of any successful legislation. Below are a few key provisions from the bill:

Individual provisions

• Top ordinary income rate increase: Rate would bump up to 39.6% from 37%
• Top capital gains rate increase: Long-term capital gains and qualified dividends would be taxed at 25%, up from the current 20%; this would generally be effective for gains recognized after Sept. 13, 2021 (an exception applies to transactions that are under a binding contract but have yet to be executed)
• High-income surtax: A new 3% surtax would be imposed on individuals with modified adjusted gross income (MAGI) over $5 million ($2.5 million for married taxpayers filing separately) and trusts and estates with MAGI greater than $100,000
• Retirement account changes: Individuals with retirement account balances of $10 million or more, who meet certain income thresholds, would have to take required minimum distributions of 50% of the amount by which the account exceeds $10 million, regardless of age; additionally, high-income taxpayers would no longer be able to contribute to Roth IRAs via “back-door” contributions