President Biden’s signature Build Back Better bill that passed in the House of Representatives contains a number of tax provisions that are designed to help pay for the $1.75 trillion legislation. The bill now heads to the Senate for consideration, where most congressional observers believe it will undergo a number of changes. While the final outcome cannot be predicted, below is a brief overview of some of the most relevant tax provisions.
Individual Income Taxes
- Creates a high-income surcharge on high-income individuals, estates and trusts. The surcharge tax would equal to 5% on adjusted gross income (AGI) in excess of $10 million plus 3% on AGI above $25 million.
- Extends the American Rescue Plan Act (ARPA) Child Tax Credit expansion through 2022 and make the entire Child Tax Credit fully refundable on a permanent basis. Individuals with an adjusted gross income that exceeds $150,000 would not be eligible for advance payments.
- Extends the ARPA’s temporary expansion of the Earned Income Tax Credit (EITC) eligibility, phase-in rates, and amount through 2022.
- Limits contributions to a Roth or traditional IRA for a tax year when balances reach $10 million. The limitation would apply to individuals with income over $400,000. Those with combined traditional IRA, Roth IRA and defined contribution retirement account balances exceed $10 million would be required to take a minimum distribution. This would be effective for tax years beginning after Dec. 31, 2028
- Prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth IRA regardless of income level. This would be effective for distributions, transfers and contributions made after Dec. 31, 2021.
- Raises the cap on the state and local tax (SALT) deduction from $10,000 to $80,000 and extends this cap through 2030. The $80,000 SALT cap amount would also apply to the 2021 tax year.
- Extends the premium tax credit through 2025 for taxpayers whose household income exceeds 400% of the poverty line. The bill also would allow certain low-income employees who are offered employer-provided health coverage to claim the credit. It makes the Section 35 health coverage credit permanent.
Pass-through Business Taxes
- Expands the base of the 3.8 percent Net Investment Income Tax (NIIT) to apply to active business income for pass-through firms with taxable income over $400,000.
- Makes permanent the active pass-through excess loss limitation enacted in the 2017 Tax Cuts and Jobs Act.
- Imposes a 15% minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after Dec. 31, 2022.
- Creates a 1% excise tax on the value of stock repurchases during the taxable year, net of new issuances of stock, effective for repurchases after December 31, 2021. Excluded from the tax are stocks contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs)
Green Energy Incentives
Build Back Better includes a wide variety of green energy incentives, including:
- A refundable income tax credit of up to $8,500 for new qualified plug-in electric drive motor vehicles that cost up to $80,000 for vans, SUVs and trucks, or $55,000 for other vehicles.
- The bill would extend the credit for residential energy-efficient property through 2033 (it is currently scheduled to expire after 2023). It would a refundable credit for years after 2023.
One non-tax provision is that it includes 12 months of paid leave benefits for caregiving leave. These paid leave benefits would not be considered gross income to the recipient.
We will continue to monitor this bill once the Senate takes up negotiations to keep you apprised of how you may be impacted.