What You Need to Know
- The final terms of the now trimmed-down $1.75 trillion spending and tax bill are unclear.
- The bill will pass the Senate via reconciliation this year or early next, Friedman predicts.
- SALT relief is likely coming, he says.
President Joe Biden’s Build Back Better plan will pass, “if not this year, it will be the beginning of next year” via reconciliation, Andy Friedman, founder and principal of The Washington Update, said Tuesday.
Friedman said in a webcast held by American Century Investments that the “final terms” of the now trimmed-down $1.75 trillion spending and tax bill are unclear.
Biden’s initial plan to raise taxes on families earning more than $400,000 a year, which essentially would have overturned the Tax Cuts and Jobs Act passed in 2017, faced opposition from Sen. Kyrsten Sinema of Arizona, a fellow Democrat, Friedman explained.
“Sinema said that she wouldn’t accept any additional higher tax rates for individuals, for capital gains, for corporations,” Friedman said. “That threw everything back to the drawing board.”
What Your Peers Are Reading
To get the bill through the Senate via reconciliation, all 48 Democrats and two independents must be on board. But Sens. Joe Manchin, D-W.Va., and Sinema have balked.
The House passed its Build Back Better bill on Nov. 19. The new bill “purports to incorporate the concerns that Manchin and Sinema have raised — whether that’s true we’re going to find out, because that bill now goes to the Senate,” Friedman said.
“The hope among the Democrats is to get the bill passed this year, and it looked like they were on track for that until some initial concerns or additional concerns raised by Manchin,” he added.
Friedman laid out what the current tax terms look like in the House bill and predicted which provisions may stay in and how they may change.
Surtax on Very High Incomes
The House version of the Build Back Better plan imposes surtaxes on taxpayers with very high incomes, Friedman explained.
“There’s a 5% surtax on income, taxpayers with adjusted gross income over $10 million and an additional 3% surtax on income over $25 million,” Friedman said. “So it’s a total of 8% on those. Those are very high numbers for most of our clients.”
Friedman said: “There’s a couple things to keep in mind here. Adjusted gross income includes capital gains, so clients that have very high unrealized gains in their assets — maybe they bought Apple stock way back at the beginning, maybe they did the same with PayPal — when they sell that stock, the gain on that is going to get included in the $10 million threshold.”
The new provision will go into effect beginning next year, “so that will be when we first start looking at this amount of income,” he said.
But “for trusts — we’re talking here about nongrantor trusts, trusts that pay their own income tax on their own earnings — the numbers are much, much lower,” Friedman continued. “The 5% surtax will apply to trust income over $200,000 and the additional 3% surtax will apply to trust income over $500,000. So many trusts that our clients may hold are going to get slammed with an additional 5% or 8% surtax really at quite low income levels.”
House lawmakers raised the cap on the federal deduction for state and local taxes, or SALT, to $80,000 from the $10,000 imposed by tax law in 2017.