Potential Income Tax Implications of the Build Back Better Act
The House of Representatives passed the Build Back Better Act Friday on November 19. The bill still must pass the Senate and be signed by the President. In its current form, the bill contains a variety of individual income tax provisions to provide incentives to taxpayers and raise revenue to pay for new spending. CBM will continue to communicate with you as the bill passes to the Senate and President Biden. Our team has developed the list below of some of the most critical provisions we believe clients could benefit from.
High-Income Taxpayer Surcharge
The bill creates a surcharge on high-income individuals, estates and trusts. The surcharge would equal the sum of 5% of the amount of the taxpayer’s adjusted gross income (AGI) that exceeds $10 million ($5 million for married taxpayers filing separately; $200,000 for an estate or trust), plus 3% of the amount of the taxpayer’s AGI that exceeds $25 million ($12.5 million for married taxpayers filing separately; $500,000 for an estate or trust).
State and Local Tax Deduction Cap
The bill would increase 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) through 2031.
Extension of Expanded Child Tax Credit; Permanent Extension of Refundability
The child tax credit enacted by the American Rescue Plan Act (ARPA) for 2021 would be extended through 2022. The IRS would continue to make advance payments of the credit throughout 2022. Taxpayers whose adjusted gross income (AGI) exceeds $150,000 for joint filers, $112,500 for heads of household, or $75,000 for other taxpayers, would not be eligible for advance payments.
The bill would extend the refundability of the child tax credit beyond 2022.
Limitation on Interest Expense Deduction
The bill would add a new Sec. 163(n) that limits the amount of net interest expense of certain domestic corporations (or foreign corporations engaged in a U.S. trade or business) that are members in an international financial reporting group. The provision limits the interest expense deduction to an “allowable percentage” of 110% of the domestic corporation’s net interest expense.
Net Investment Income Tax
The bill would apply the 3.8% tax to net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income over $400,000 (single filers), $500,000 (married taxpayers filing jointly or surviving spouses) or $250,000 (married taxpayers filing separately).
Wash-Sale Rules
The bill makes commodities, foreign currencies, and crypto assets subject to the wash-sale rules.
Excess Business Losses
The bill would make permanent the limitation on excess losses of noncorporate taxpayers.
Small Business Stock and High-Income Taxpayers
The bill amends the treatment of gains on the sale of certain small business stock to disallow the 75% and 100% exclusion if the taxpayer’s AGI is over $400,000. This includes trusts and estates.
Extending Expanded Earned Income Tax Credit
The bill extends the changes to the earned income tax credit that were enacted by the American Rescue Plan Act through 2022. The increase in the earned income and phaseout amounts would be indexed for inflation in 2022.
Expanded Premium Tax Credit
The bill would increase the amounts for premium assistance through 2025. The bill would also extend through 2025 the rule that allows the premium tax credit to certain taxpayers whose household income exceeds 400% of the poverty line. The bill would also modify the employer-sponsored coverage affordability test in the premium tax credit through 2025.
The bill would exclude a portion of lump-sum Social Security benefit payments when determining household income for purposes of the credit. The bill would also exclude the first $3,500 of income of dependents who have not reached the age of 24.
Through 2025, the bill would also allow certain low-income employees who are offered employer-provided health coverage to claim the credit. The bill would also make permanent the Sec. 35 health coverage credit, which is currently scheduled to expire at the end of 2022.
FDII and GILTI Changes
The bill would reduce the applicable percentage for the foreign-derived intangible income (FDII) deduction from 37.5% to 24.8% and the applicable percentage for the global intangible low-taxed income (GILTI) deduction from 50% to 28.5%, resulting in an effective FDII rate of 15.8% and an effective GILTI rate of 15%. The bill would also allow the FDII deduction to be taken into account when determining a net operating loss deduction.
Additionally, the GILTI provisions apply on a country-by-country basis, based on controlled foreign corporation taxable units.
Foreign Tax Credit Limitation
The bill amends the foreign tax credit limitation on a country-by-country basis and by taxable unit. The bill also repeals the carryback of the foreign tax credit. The foreign tax credit changes will apply to tax years beginning after Dec. 31, 2022.
Green Energy Incentives
Individual taxpayers would be eligible for various green energy and energy-efficiency incentives under the bill. The bill extends the nonbusiness energy property credit to property placed in service before the end of 2031. The bill extends the credit for residential energy-efficient property through 2033 (it is currently scheduled to expire after 2023). It would become a refundable credit for the years after 2023. Qualified battery storage technology expenditures would be made eligible for the credit. The credit for new energy-efficient homes would be extended through 2031.
Electric Vehicle Tax Credits
The bill provides for a refundable credit of up to $8,500 for new qualified plug-in electric drive motor vehicles. The credit would be available for qualified electric vehicles that cost up to $80,000 (for vans, SUVs, and trucks) or $55,000 (for other vehicles). The bill also provides a credit of up to $7,500 for two- or three-wheeled plug-in electric vehicles. The credit phases out for taxpayers with AGI over $500,000 (married taxpayers filing jointly) or $250,000 (single taxpayers). A smaller credit would be available for the purchase of qualifying used electric vehicles. The bill also provides a credit for the purchase of certain new electric bicycles.
The bill provides a credit for qualified commercial electric vehicles. The credit would equal up to 30% of the basis of a fully electric vehicle or 15% of the basis of a hybrid vehicle.
The bill extends the credit for the purchase of a qualified fuel cell motor vehicle and the alternative fuel vehicle refueling property credit through 2031.
The bill restores the exclusion for qualified bicycle commuting benefits and increases the maximum benefit from $20 per month to $81 per month.
Retirement Plans
The bill prohibits contributions to a Roth or traditional IRAs if the contributions would cause the total value of an individual’s retirement accounts as of the end of the prior tax year to exceed (or further exceed) $10 million. The limitation would apply to individuals with income over $400,000 (single filers and married filing separately), $425,000 (heads of household) or $450,000 (married taxpayers filing jointly).
If an individual’s combined retirement account balances generally exceed $10 million at the end of a tax year and the individual meets these same income thresholds, a minimum distribution would be required for the following year.
These provisions would be effective for tax years beginning after December 31, 2028.
The bill prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA regardless of income level, effective for distributions, transfers and contributions made after December 31, 2021.
The bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers and contributions made in tax years beginning after December 31, 2031.
Please contact Richard Morris via our online contact form with any questions about the impact of the Build Back Better Act on your situation.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
