Now that the House of Representatives has passed the Infrastructure Investment and Jobs Act, focus shifts to finalizing negotiations and passing the Build Back Better Act (BBB). To fund the BBB, original drafts included widespread tax increases on individuals and corporations, including an increase in the capital gains rate for transactions occurring after September 13, 2021. However, due to concerns from some Senators whose votes are needed to pass the BBB, most tax rate increases, including the increase in capital gains rates are not included in the recent BBB draft legislation.
For those that are considering a significant capital gain transaction, there may be an incentive to close the transaction prior to the end of 2021. The most recent draft legislation contains a surtax on high income individuals. A 5% surtax will be applied to individuals, estates, and trusts with modified adjusted gross income, (which includes capital gains), in excess of $10,000,000 ($5,000,000 for a married individual filing separately or $200,000 in case of an estate or trust). On top of that, if the individual has modified adjusted gross income, again including capital gains, in excess of $25,000,000 ($12,500,000 for a married individual filing separately or $500,000 in case of an estate or trust), an additional 3% surtax will be applied on the excess amount. Therefore, there could be an additional 8% tax on a transaction that closes in 2022 vs 2021.
While it is unknown what the final legislation may contain, the elimination of a rate increase on capital gains in the draft legislation is encouraging.