Tax Reform: What's In and What's Out (For Now)

Tax Reform: What’s In and What’s Out (For Now)


After more than two months of negotiations in the US Congress, a slimmed-down version of the “Build Back Better Act” narrowly passed the US House of Representatives on November 19, 2021. All but one House Democrat voted for the measure, which united Republicans in opposition. Compared to the initial set of proposed revenue raisers that was released by the House Ways and Means Committee on September 13, 2021, the revenue-raising provisions in the legislation that passed the House are more modest in scope and result in only a few changes to the way individual taxpayers and family wealth are taxed. The summary below describes provisions in the House-passed bill that are most likely to affect individual taxpayers and also discusses portions of the original proposal that were cut from the legislation that passed the House. The US Senate is expected to make changes in order to capture the votes needed for passage.

In Depth


Income Tax

The legislation contains two surcharges on high income individuals, estates and trusts effective after December 31, 2021. A 5% surcharge will be imposed on an individual’s modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for a married individual filing separately; $200,000 for estates and trusts) and an additional 3% surcharge will be imposed on MAGI that exceeds $25 million ($12.5 million for a married individual filing separately; $500,000 for estates and trusts).

All trade or business income earned by taxpayers earning more than $400,000 ($500,000 for married filing jointly; $13,050 for trusts) will be subject to the 3.8% Net Investment Income Tax (NIIT). The NIIT does not apply to income that is subject to self-employment tax. Under prior law, active business income earned through pass through entities was not subject to NIIT.

The cap on the state and local tax (SALT) deduction will be raised from $10,000 to $80,000 through 2030. Trusts and estates will be limited to $40,000. This provision applies for the 2021 tax year.

The capital gain exclusion rates for qualified small business stock (QSBS) will be limited to a 50% exclusion (down from 75% and 100%) for individuals earning more than $400,000 and for trusts and estates regardless of income. This rule is effective for sales after September 13, 2021, unless the seller had a binding contract entered into on or before that date and if the sale occurs by year-end.

Individual Retirement Accounts (IRAs)

Taxpayers with an adjusted gross income above $400,000 ($450,000 for married filing jointly) will be prohibited from completing Roth conversions starting in 2032. In addition, the legislation also includes a general prohibition on “backdoor” Roth conversion of amounts held in qualified retirement plans, if any portion of the distribution that is being converted consists of after-tax contributions. This provision is effective starting in 2022.

Taxpayers with adjusted gross incomes above $400,000 ($450,000 for married filing jointly) will be prohibited from making contributions to retirement accounts (other than SEP and SIMPLE IRAs) when the total value of all defined contribution accounts and IRAs (including inherited accounts) is $10 million or greater. Those taxpayers will also be required to receive mandatory distributions of 50% of the excess over $10 million held in retirement accounts (other than Roth accounts) and mandatory distributions of the entire excess over $20 million held in Roth accounts. Each of these provisions come into effect for tax years beginning after December 31, 2028.


As discussed in our September 17, 2021, On the Subject, the initial set of proposed revenue raisers would have had a profound impact on the way wealth would have been taxed in the United States. Some of the most impactful provisions included in the original proposal were the following:

  1. An earlier than scheduled 50% reduction to the estate and gift tax exclusion amount and the generation skipping transfer tax exemption;
  2. Fundamental changes to the grantor trust rules, which would have resulted in gain recognition on previously tax-free transactions and the application of the estate and gift taxes to assets held in and distributed from grantor trusts covered by the post-enactment rules;
  3. The elimination of traditional valuation discounts that are often utilized when valuing an interest in an entity that holds non-business assets;
  4. The imposition of investment restrictions on IRAs that would prevent retirement accounts from holding certain assets, such as private placement investments and investments in entities in which the account holder owns substantial interests either directly or constructively;
  5. The increase in the top marginal rate on ordinary income; and
  6. The increase in the top long-term capital gains rate for taxpayers in the highest ordinary income tax bracket.

While each of the above provisions were not included in the legislation that passed the House, the proposed legislation signals that lawmakers are looking closely at ways to raise revenue by assessing taxes on family wealth. Clients should be aware that similar provisions could surface in future legislation.

Although the Build Back Better Act was significantly altered before House passage in order to make it more palatable to key Senate Democrats, the legislation does not yet have the support it needs for passage from all 50 Senate Democrats. Multiple Democratic Senators are advocating changes to both the spending and revenue raising portions of the Act; thus, individuals should expect changes. Should the Senate manage to pass its own version of the Build Back Better Act, that Senate-passed version of the legislation would return to the House for passage before heading to President Joe Biden’s desk for signature.