Andy Friedman Predicts Fate of Build Back Better Bill

 Commentary  December 09, 2021 at 07:44 AM  Share & Print

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.”

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.”

SALT Relief

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.

The House’s Build Back Better bill “did include some relief — it increased that $10,000 limitation up to $80,000, so it kept the limitation but raised it,” Friedman said. “That new rule, if it gets passed, would apply to 2021 as well, not just 2022, which means that when we file returns next year for 2021 taxes, if passed there would now be an $80,000 limitation.”

There’s a lot of debate, however, in the Senate about what to do here, he continued.

“It looks like the Senate is not going to simply rubber-stamp what the House did,” Friedman said.

Sen. Bernie Sanders, I-Vt., has said that “the limitation should be kept in place, but only for taxpayers with income over $400,000.”

Sen. Bob Menendez, D-N.J., has said “’No, the limit has to be much higher,’” Friedman stated. “My reaction is we are going to get some relief in the Senate, that something will be included in the bill.”

Elimination of Backdoor Roth Conversions

Another provision in the House’s Build Back Better bill would eliminate backdoor Roth conversions.

“I suspect you are using this technique to help your clients,” Friedman said. “Under current law, if a client has more income that allows them to make an additional contribution to a Roth, what they do instead is make a nondeductible contribution to a regular IRA and then roll or convert that IRA into a Roth.”

Because there are after-tax assets in the IRA, he continued, “in other words, nondeductible contribution, there’s no gain when those assets are immediately converted to a Roth. We call this the backdoor IRA strategy.”

Beginning next year, the House bill would “eliminate that technique entirely,” Friedman said. “So that means that we would lose the opportunity to continue this backdoor conversion strategy after this year.”

Crypto Reporting Change

As for cryptocurrency taxation, Congress “upped reporting for cryptocurrency transactions” in the infrastructure bill, which became law.

“So right now, a lot of the brokers, the companies or people handling transfers of digital assets, have not had a requirement to report gain on those transactions to the IRS,” Friedman said. “That has allowed a lot of the income recognized on crypto transactions to fall through the cracks for tax purposes.”

The infrastructure bill now requires that “anybody that regularly handles transfers of digital assets is now going to be a broker and subject to all 1099 reporting that we normally have for any investment income earned during the year,” Friedman explained.

“So now clients or anyone who engages in crypto transactions has to expect to be taxed on those transactions because the IRS will be notified. You might say no change in tax law, but there is going to be a major change in reporting,” he said.


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