In September the House Ways and Means Committee released a draft of legislation for a $3.5 trillion spending and tax package known as the Build Back Better budget reconciliation bill. The bill contains a long list of plans for major social programs and policies, including education, healthcare, and climate change. To pay for these plans, the bill contains numerous tax provisions focused on increasing taxes on the wealthiest Americans, while attempting to reduce some of the tax burden on low and moderate-income taxpayers.
The Democrats have set a self-imposed deadline of October 31 to vote on the bill. There will likely be major changes before then as it moves through the legislative process.
Here’s a quick summary of the individual taxpayer provisions. Effective date of January 1, 2022 unless otherwise noted.
Extend the additional child tax credits and advance payments
The provisions in this legislation would extend the American Rescue Plan’s expansion of the child tax credit through December 31, 2025 with some modifications to the advance payment rules. The child tax credit would also be made permanently fully refundable.
Extend the expanded Earned Income Tax Credit
The Earned Income Tax Credit was expanded in the spring of 2021 with the American Rescue Plan, and the expansion is set to expire at the end of the year. This new legislation seeks to make permanent the changes for childless workers and adjust other relevant thresholds for inflation.
Extend the expanded Child and Dependent Care Tax Credit
The American Rescue Plan made the Child and Dependent Care Tax Credit refundable for 2021 and more than doubled the caps on eligible expenses. The percentage of eligible expenses used to calculate the credit was also increased for low and moderate-income taxpayers. If the bill passes as is these changes would become permanent beyond 2021.
Increased top tax rate
The bill proposes an increase of the top marginal individual income tax rate from 37% to 39.6%. The new rate would apply to lower income thresholds than the old top rate, applying to single taxpayers with taxable incomes over $400,000 (down from $523,601) and married filing jointly with income over $450,000 down from ($628,301).
Surcharge for high incomes
Both married filing jointly and single taxpayers would be subject to an additional 3% tax on modified adjusted income exceeding $5 million. Trusts with MAGI exceeding $100,000 would also be subject to the tax.
Limits on retirement contributions for high earners
Under current laws, taxpayers can make contributions to certain retirement accounts regardless of their income. With this new bill, no further contributions to an IRA or Roth IRA would be permitted if the total balance of accounts exceeds $10 million at the end of the prior year for single taxpayers with income over $400,000 and married filing joint with income over $450,000. In addition, if their combined IRA, Roth IRA, and defined contribution retirement account balances exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year, generally 50% of the amount the combine account balance exceeds $10 million.
While contributions to Roth IRAs are already restricted by income, the limitations are skirted by making nondeductible contributions to a traditional IRA and then converting it to a Roth. For the same group of high-income taxpayers as above, the bill would eliminate these “back door” Roth conversion strategies for both IRAs and employer-sponsored plans. This would take effect January 1, 2022, with certain rollover provisions not beginning until 2032.
Increase the SALT cap
The current version of the bill would boost the $10,000 cap on the federal deduction for state and local taxes to $80,000 from 2021 through 2030, before dropping it back to $10,000 for 2031. Without any changes, the current $10,000 limit is set to expire after 2025.
Increased capital gains rate
The bill proposes to increase the long-term capital gains and qualified dividend income tax rates from 20% to 25% for gains and income recognized after September 13, 2021.
Expand the Net Investment Income tax
The 3.8% net investment income tax would be expanded to cover net investment income from pass through entities that is not otherwise subject to the FICA or SECA tax. Profits from S Corporations, LLCs, and LPs will be subject to the tax for single taxpayers with greater than $400,000 in taxable income or $500,000 for married filing jointly, as well as for trusts and estates.
Limits on the Qualified Business Income Deduction
The maximum allowable QBI deduction would be $400,000 for single taxpayers, $500,000 for married filing jointly, and $10,000 for a trust or estate. This equates to a deduction cap on qualified business income exceeding $2 million for single filers, $2.5 million for married filing joint, and $50,000 for trusts.
Limits on excess business losses
The bill would permanently disallow excess business losses from offsetting more than the threshold amount ($262,000 for single filers, $524,000 married filing joint for 2021) of nonbusiness income. The limitation was introduced as part of the Tax Cuts and Jobs Act of 2017 and was set to expire in 2025.
Qualified small business stock exclusions reduced
The current 75% and 100% exclusion rates for gains realized from certain qualified small business stock would not apply to taxpayers with an AGI exceeding $400,000. The 50% exclusion would remain available. If the bill passes as is this would be retroactive to gains from sales and exchanges occurring after September 13, 2021.
Reduction of estate and lifetime gift exclusion
The lifetime gift exemption would be lowered to $5 million per person (indexed for inflation) from its current level of $11.5 million per person.
Watch our page for updates negotiations continue in the House.