By Zach Wimberger
On November 19, 2021, the House of Representatives passed the Build Back Better Act (“BBBA”) for advancement to the Senate. Included in the bill are various tax provisions that have been topics of discussion for many weeks between taxpayers and their tax preparers. Since its introduction, there have been numerous changes, additions, and exclusions to these provisions that have made it difficult to project what additional tax planning strategies taxpayers should consider before 2021 comes to a close. With the House passing of the BBBA, we can finally get a good glimpse at what could be in store for the 2021 tax year and beyond.
Tax Provisions Found Within the Build Back Better Act
The following tax provisions have managed to make it through the House version of the BBBA to be brought up for consideration and a vote in the Senate. These provisions would be effective for tax years beginning after December 31, 2021, unless stated otherwise.
- The bill would extend the expansion of the Child Tax Credit and Earned Income Credit from the American Rescue Plan Act through 2022. It will also make permanent the Child Tax Credit’s ability to be fully refunded.
- The bill would introduce a tax surcharge on the Modified Adjusted Gross Income (“MAGI”) of high income earners. There would be a five percent surcharge for individuals, estates, and trusts with a MAGI over $10 million for single and married filing jointly ($5 million for married filing separately), with an additional three percent surcharge for MAGI over $25 million for single and married filing jointly ($12.5 million for married filing separately). MAGI is defined as Adjusted Gross Income less investment expenses.
- An increase in the State and Local Tax (“SALT”) deduction limitation which was previously introduced with the Tax Cuts and Jobs Act (“TCJA”). The current limitation of $10,000 would be increased to $80,000 for single and married filing joint filers (new limitation of $40,000 for married filing separately, trusts, and estates). The limitation would also be extended to 2031. This change would be effective for tax years after December 31.
- The bill would expand the 3.8% Net Investment Income Tax (“NIIT”) to be included in all pass-through business income for taxpayers with taxable income over $400,000 (single), $500,000 (married filing joint), and $250,000 (Currently, the NIIT applies only to passive pass-through business income. Pass-through business income that is already subject to self-employment taxes would not be subject to this change.
- The bill would make permanent the $500,000 excess business loss limitation on pass-through income that was previously introduced with the TCJA.
- The bill would prohibit the contributions to IRAs, both traditional and Roth, if the total value of the account exceeds $10 million. This disallowance would only apply to taxpayers with taxable income over $400,000 (single and married filing separately), $425,000 (heads of household), or $450,000 (married filing jointly). Accelerated minimum distributions would also be required.
Tax Provisions Left Out of the Build Back Better Act
Just as important as the provisions found within the House approved BBBA, so too are the provisions that have been excluded from the bill. These provisions were included in earlier versions and have since been removed and would need to be approved in a separate bill.
- Absent is the increase in the top tax bracket for individuals from 37% to the 39.6% rate pre-TCJA.
- Absent is the increase of the top capital gains rate from 20% to 25%, as well as retroactive applicability.
- Absent is the removal of any limitations to the 20 percent section 199A qualified business income deduction for high income taxpayers.
- Also absent in the bill are the many proposed changes to Grantor Trusts, estates, and gift taxes including the reduction of the $11.7 million gift tax exemption down to $6 million, the taxability of Grantor contributions made after the date of enactment at the time of the Grantors passing, and the sale of assets between a Grantor trust and the Grantor being subject to income tax.
While this bill gives us some good insight on what to expect as we approach year-end, it is important to note that the bill still needs to make its way through the Senate, before it can be brought to President Biden for enactment into law. During the Senate process, changes can be made to the tax provisions of the bill and we will provide updates as they materialize. If you have any questions about the Build Back Better Act and how it relates to your tax situation, we recommend you reach out to your tax preparer.
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