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Tax Reform on the Horizon - What the US tax reform provisions contained in the BBBA could mean for you and your family

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Tax Reform on the Horizon - What the US tax reform provisions contained in the BBBA could mean for you and your family

On November 19, 2021, the U.S. House of Representatives passed the Build Back Better Act (“BBBA”), which is now being considered by the U.S. Senate. The tax reform provisions of the BBBA also materially revised earlier proposals for tax reform which were initially proposed on September 14, 2021, as a way to pay for the provisions of the BBBA. Notably, the Bill which was passed by the U.S. House of Representatives has removed some of the provisions that were considered concerning to wealthy families and their advisors. The final Bill also added certain other provisions to raise the revenue required to pay for the BBBA. 

You can find HSBC Global Private Banking’s recent article on the previous tax reform proposal here.

The following is a brief summary of how the tax reform provisions of the final bill have been modified from the previous proposal.

Provisions removed from the earlier proposal 

Following are some of the key provisions that were included in the earlier version of the tax reform proposal but have been removed from the Bill which was passed by the U.S. House of Representatives.

  • Removal of early termination of expanded transfer tax exemptions. Prior tax reform enacted in 2017 temporarily doubled the US transfer tax exemptions (the estate tax, gift tax, and generation-skipping transfer tax) available to individuals through December 31, 2025. This exemption is currently USD11,700,000 for 2021 and indexed annually for inflation. The final Bill removes a provision from the original proposal which would have accelerated the expiration date of this expanded exemption to December 31, 2021. 
  • No increases to marginal US income tax rates and capital gains rates for individuals. The final Bill does not include marginal tax rate increases on ordinary income and capital gains for taxpayers with income in excess of USD400,000 per year (USD450,000 for married taxpayers who filed jointly), which were included in the original proposal. 
  • Removal of the requirement to include grantor trust assets in the grantor’s estate. The final Bill no longer contains a provision which would treat the assets held by grantor trusts formed after December 31, 2021 as includible in the grantor’s estate when the grantor dies. 
  • No recognition of sales between a grantor and the grantor’s trust. The final Bill removed a provision which would have treated sales between a grantor and their grantor trust as a taxable transaction. 

New provisions included in the BBBA

Additionally, there are a number of new provisions included in the final Bill, including:

  • Surcharge on High-Income Taxpayers. The BBBA proposes a surcharge of 5 per cent on individual income earned in excess of USD10,000,000 per year and on trust income earned in excess of USD200,000 per year; as well as an additional surcharge of 3 per cent on individual income earned in excess of USD25,000,000 per year and on trust income earned in excess of USD500,000 per year.
  • Corporate Profits Minimum Tax. The BBBA proposes a new 15 per cent minimum tax on the book profits of corporations (other than S corporations, regulated investment companies, or real estate investment trusts) that report an average of more than USD1 billion of adjusted financial statement income over a three-year period.
  • Increase to State and Local Tax Deductibility. One provision will be welcome news to many taxpayers: policy makers are proposing an increase in deductibility of state and local taxes. Under current law, individuals can only deduct up to USD10,000 in state and local taxes from taxable income. Policymakers have proposed increasing the limitation to USD80,000 through tax year 2030.

The BBBA is now being considered by the U.S. Senate, it is possible that further revisions could be made before the bill is finalized and reconciled by both Houses of Congress. In addition, there will be substantial regulatory guidance required following enactment of the statute. Our Wealth Planning and Advisory team is following the progress of the BBBA carefully, and stands ready to provide you with additional insights, including possible planning opportunities that may help you understand how the BBBA will impact your own tax planning.

Stay tuned for more information, and as always, please reach out to your Relationship Manager for assistance.

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