Capitol Hill is producing more drama than Hollywood. 

There’s a lot of bold talk, ultimatums, cliff-hangers, and confusing sequels.

We can only wait and see how this movie ends. Though, you could call your state representative and senators.  

Let’s recap what we know with some educated speculation about what could happen next.

Congress is currently debating two action items on President Biden’s “Build Back Better” agenda: The American Jobs Plan (Physical Infrstructure, Bipartisian support in the Senate) and the American Families Plan (Reconciliation Bill, “Human Infrastructure,” expanded social welfare programs, includes individual tax increases).¹  

The Infrastructure Bill ($1.2 trillion) passed with bipartisan support in the Senate, and now is being held hostage in the House of Representatives as leverage to force more centrist Senate democrats to pass the Reconciliation Bill ($3.5 trillion, American Families Plan). 

The American Jobs Plan ($1.2 trillion) – “Infrastructure Bill / Bi-partisan Bill”

• $110 billion for roads, bridges, and other major projects
• $11 billion in transportation safety programs
• $39 billion in transit modernization adn improved accessibility
• $66 billion in rail
• $7.5 billion to build a national network of electric vehicle chargers 
• $73 billion in power infrastructure adn clean energy transmission
• $65 billion for broadband development
• Increases corporate tax rate from 21% to 28% ² 

The Reconciliation Bill is significantly more mysterious apart from the spending and proposed tax increases. 

The American Families Plan ($3.5 trillion) – “Reconciliation Bill, Human Infrastructure”

• Expands Medicare.
• Taxpayer funded community college and prekindergarten.
• Increases the “federal safety net.”³

Neither plan looks close to passing in its current form, so nothing is set in stone yet.

But the provisions below offer a blueprint for what could happen.

The House is negotiating a package of tax increases to partially fund the Reconciliation Bill. 

If passed as-is, it would:

• Increase the top marginal income tax rate to 39.6% for individuals earning more than $400,000, joint filers above $450,000, and head of household filers above $425,000.
• Raise the top long-term capital gains rate from 20% to 25% for those same folks.
• Add a 3% tax on incomes of over $5 million.

Retirement accounts may see new restrictions.⁴

Roth conversions would be eliminated for individuals earning above $400,000. 

Folks in that income bracket would also be prohibited from contributing to retirement accounts with an aggregate value over $10 million the prior tax year.

Another critical change that would affect all taxpayers: The bill prohibits all employee after-tax contributions to qualified plans and prohibits after-tax IRA contributions from being converted to Roth, thus potentially eliminating backdoor Roth conversions and MEGA-backdoor Roth convervisions.

Estate planning may get more complicated.⁴

The estate tax exemption would effectively be cut in half from $11.7 to $5 million.

The deal would also eliminate certain tax benefits of “grantor trusts” as well as limit valuation discounts on non-business assets.

Trusts with income over $100,000 would have an additional 3% surcharge tax. 

Currently, these provisions would apply only to future trusts and transactions that happen after the effective date of the law.

More taxes for business owners. 

There would be a 3.8% Net Investmetn Income Tax (NIIT) to S-corp distributions for taxpayers with income higher than $400,000 (individual) or $500,000 (married filing jointly). 

How likely are all these measures to pass?

There is some chance that neither bill passes into law, but I see that as an unlikely scenario. 

To pass the American Families Plan using budget reconciliation, President Biden needs the votes from his entire party.

Progressives are committed to passing both bills, and using the  but centrists are balking at the price tag.¹

To get through the Senate, it seems like both sides will meet somewhere in the middle.

A lower final cost to the bill would require less revenue to cover and might allow some of the tax increases to be eliminated.

Since the IRS has been targeting Roth conversions and large IRAs, it’s possible that those measures may pass.

When could the new laws go into effect?

It seems likely that most provisions would be effective on January 1, 2022 and apply going forward (not retroactively). However, separate deadlines could be negotiated for certain provisions.

Bottom line: Laws change. We have no choice other than to adapt.

Here are the usual caveats:

We don’t know what the final bills will look like and when (or if) they will pass.

Have questions you haven’t asked me or concerns you haven’t raised? Please reach out.

If I see moves that I’d like you to make before year-end, I’ll contact you directly.

Sincerely,

Wyatt Swartz