The House Democrats’ $2 trillion Build Back Better Act could be signed into law shortly, bringing with it a host of tax reforms. The significant social safety net expansion is presently in the Senate, where it's anticipated to be revised before being sent to Joe Biden's desk for signing.
From additional taxes on adjusted gross taxable income to increased limits on SALT deductions, here are the possible outcomes of the bill's proposed tax changes.
Income tax changes would impact wealthy Americans
The planned tax reforms would largely affect wealthy Americans. Currently, the nation has a 37 percent tax on adjusted gross income for individuals earning more than $10 million per year. The Build Back Better Act imposes a surtax of 5 percent and an additional 3 percent for people earning more than $25 million. The surtax is expected to raise $230 billion over the next decade.
At the moment, the bill also includes a temporary boost in the federal deduction for state and local taxes, known as SALT, from $10,000 to $80,000. Companies that report more than $1 billion in annual earnings to their shareholders for three consecutive years would be liable to a minimum tax of 15 percent under the Build Back Better Act. It would also extend the nation’s popular enhanced child tax credit until 2022.
Build Back Better would increase capital gain tax rates
Long-term capital gains are incurred on assets that have risen in value and are sold after more than a year of ownership. Long-term capital gains would be taxed at a top federal rate of 25 percent, up from the current rate of 20 percent. When combined with the present 3.8 percent surtax on net investment income, the overall tax burden would be 28.8 percent. It's estimated that these measures will cost up to $3.5 trillion. Short-term capital gains would be subject to ordinary income tax rates.
Biden’s proposed bill would tax an asset’s appreciation when its owner dies. This would prevent the rich from passing on their stock and other financial assets to the next generation with little or no tax consequences.
Biden proposes mileage tax
The Build Back Better Act also proposes a vehicle mileage tax pilot program. Participants would log the number of miles driven in passenger and commercial cars and pay fees based on the number of miles driven. Enrollment would be optional, and all participants would be completely reimbursed for any fees paid. If approved, the program would run from 2022 to 2026.
The proposed mileage tax is designed to supplement and eventually replace gas taxes, which have declined significantly in recent years as gas mileage has increased and electric car ownership has rapidly expanded. However, it’s difficult to foresee how these proposals may change as the Senate starts negotiations. Many financial advisors suggest waiting for the final legislation before making any major decisions.