Proposed Tax Law Changes are Brewing
Key Provisions within the Build Back Better Act and What They Mean for You!
On Friday, November 19, 2021, the U.S. House of Representatives passed H.R. 5376, the Build Back Better Act, by a vote of 220 to 213. This proposed legislation is a momentous milestone and propitious turning point for our nation. Chair of the House Budget Committee John Yarmuth accurately describes the bill as making “transformative investments at the scale necessary to meet the needs of the American people, address dangerous deficits in our society, improve our economic outlook, and set America up to compete and win in the decades ahead.”
This fiscally responsible bill, which now heads to the Senate, contains a wide variety of tax provisions designed to reduce the deficit over the long-term. Its funding will originate from America’s wealthiest individuals and largest corporations, which until now, have not paid their “fair share” in federal taxes. President Biden has affirmed on multiple occasions that no individual earning less than $400,000 a year will pay a single penny more in income tax. Instead, the President guarantees that the bill will ease costs for millions of families and give working people and the middle class a fighting chance. This article will highlight eight of the most significant tax provisions within the bill – ranging from a 15% minimum tax on profits of large corporations to a $12,500 refundable electric vehicle tax credit for individuals, and much more.
#1. Increased State and Local Tax Deduction
The bill would increase the limitation on the deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married taxpayers filing separately and for trusts and estates). Currently, if a taxpayer itemizes their deductions, the maximum deduction that can be claimed for state and local taxes is $10,000. Any state and local taxes paid beyond this amount yields no benefit. For example, if a taxpayer pays $8,000 in real estate taxes to their local county tax assessor and pays $18,000 in state income taxes to the Georgia Department of Revenue (via income tax withholding on their W-2 wages or via estimated tax payments), they’ve cumulatively paid $26,000 in state and local taxes. Under the current law, this would result in a $10,000 deduction and a $16,000 “unutilized” deduction. Under the proposed law, this would result in a full $26,000 deduction. This change in limitation would extend through year 2031.
#2. Child Tax Credit
The bill would extend the expanded Child Tax Credit enacted by the American Rescue Plan earlier this year. For tax year 2022, like during tax year 2021, the credit amount would be $3,000 for each qualifying child between ages 6 and 17 at the end of the year and $3,600 for each qualifying child aged 5 or younger at the end of the year. The full credit would be available to married taxpayers filing jointly with modified adjusted gross income under $150,000 ($75,000 for single taxpayers or married taxpayers filing separately). Again, the IRS would be required to make advance payments of the credit throughout 2022. Beginning in 2023, the credit will revert to $2,000 per child from the current $3,000 or $3,600 cap. One change would remain permanent, however: the full refundability of the tax credit. This means that America’s most deprived families – those that don’t typically earn enough to have a tax return filing requirement – will continue to qualify for this crucial credit.
#3. Electric Vehicle Tax Credit
The bill would provide a refundable income tax credit of up to $12,500 for new qualified plug-in electric drive motor vehicles (the current maximum credit only reaches $7,500). The exact amount of the amplified credit would depend on a few different criteria: whether it was manufactured in the United States, whether it was assembled using union labor, etc. The credit would apply to those vehicles that cost as much as $80,000 (for vans, SUVs, or trucks) or $55,000 (for all other vehicles). It would phase out for married taxpayers filing jointly with adjusted gross income more than $500,000 ($250,000 for single taxpayers or married taxpayers filing separately). Lastly, under the current law, no credit is available when purchasing a used electric vehicle. Under the proposed law, a $4,000 maximum credit would be available if the used electric vehicle is at least two years old, costs less than $25,000, and includes at least a 40-kilowatt-hour battery.
#4. Retirement Plan Provisions
The bill would close the “backdoor” Roth IRA contribution strategy by prohibiting all employee after-tax contributions in qualified retirement plans and after-tax IRA contributions from being converted to Roth dollars – regardless of income level. This provision would become effective on December 31, 2021. Moreover, the proposed bill would eliminate Roth conversions for both IRAs and employer-sponsored plans for married taxpayers filing jointly with taxable income over $450,000 ($400,000 for single taxpayers or married taxpayers filing separately). This provision would apply to distributions, transfers, and contributions made in tax years beginning after December 31, 2031. Furthermore, the bill would prohibit additional contributions to Roth or traditional IRAs for any tax year in which the contributions would cause the combined value of an individual’s IRAs and defined contribution retirement accounts to exceed $10 million. Again, this would apply to married taxpayers filing jointly with taxable income over $450,000 ($400,000 for single taxpayers or married taxpayers filing separately). Finally, if an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances exceed $10 million (for the same income thresholds listed previously), a minimum distribution would be required the following year. Luckily, these last two provisions would become effective beginning after December 31, 2028.
#5. Net Investment Income Tax (NIIT)
The bill would transform the way that the net investment income tax applies to individual taxpayers. Under current law, taxpayers must pay a 3.8% surtax on certain net investment income if their modified adjusted gross income exceeds certain thresholds: $250,000 married filing jointly, $125,000 married filing separately, or $200,000 single. Currently, the IRS defines investment income as “interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and business income derived from passive activities.” Passive activities include trade or business activities in which there is no material participation (i.e., no participation on a regular, continuous, and substantial basis). Under the proposed law, the 3.8% net investment income tax would be expanded to include all trade or business income – passive or nonpassive. The nonpassive activity business income inclusion would apply if modified adjusted gross income exceeds the following thresholds: $500,000 married filing jointly, $250,000 married filing separately, or $400,000 single. This proposal would be effective for taxable years beginning after December 31, 2021.
#6. Minimum Tax on Profits of Large Corporations
The bill would impose a new 15% minimum tax on profits of large corporations that report over $1 billion in profits annually for a three-year period. The $1 billion profit threshold is lessened to $100 million in the case of a corporation with foreign parents. It is important to note that this new law would not apply to S-Corporations, regulated investment companies, or real estate investment trusts (REITs). This new law would likely only apply to roughly 200 American corporations – one of which is Amazon. Over the past three years, Amazon has reported $45 billion in profits, yet paid an effective tax rate of only 4.3%.
#7. High-Income Surcharge
The bill would impose a surcharge (supplemental to any other income taxes owed) on ultra-high-net-income individuals, estates, and trusts. The surcharge tax would be calculated as follows: the sum of 5% of the taxpayer’s adjusted gross income that exceeds $10 million ($5 million for married taxpayers filing separately and $200,000 for an estate or trust) plus 3% of the taxpayer’s adjusted gross income that exceeds $25 million ($12.5 million for married taxpayers filing separately and $500,000 for an estate or trust).
#8. Funding for the Internal Revenue Service
The bill would provide additional funding for the Internal Revenue Service’s tax enforcement activities. As a result of various budget cuts over the past 10 years, the IRS workforce has shrunk by roughly 20,000 employees. However, the country’s population has grown by 19.5 million. The bill would allocate $80 billion in additional funding to the IRS to combat this disparity. The funds would be used on technology upgrades and the hiring of significant levels of personnel – to improve customer service and to collect more of the taxes owed by wealthy individuals and large corporations. Currently, the IRS does not have the necessary resources needed to pursue imperative audit and collection activities. The Congressional Budget Office estimates this $80 billion initiative will increase revenues by $207 billion, thus decreasing the deficit by $127 billion through 2031.
These are just eight of the many provisions contained within the Build Back Better Act. This forward-thinking and revolutionary piece of legislation lays the foundation for limitless economic growth and boundless prosperity for decades to come. From guaranteed universal free preschool for all three- and four-year old children to increasing the maximum Pell Grant by $550 for more than 5 million students across the nation, the plan would undoubtedly affect many Americans in a positive way. For quite some time, our economy has functioned positively for those at the top, while working families have been left behind. This bill will undeniably create a more equitable situation for our nation as a whole. Members of the Senate hope to vote on this bill before the end of the year.
A full copy of the bill can be viewed here: https://www.congress.gov/bill/117th-congress/house-bill/5376/text. Should you have additional questions, please contact Jeff Audi via e-mail at [email protected] or via telephone at 404-702-8290.
