Build Back Better Bill - Tax Provisions

Now that the bill has passed the House, I would like to discuss the income tax provisions of the Bill. Keep in mind changes are expected before the bill eventually passes (if it passes) in the Senate, but this is what we know as of today.

Extension of Child Tax Credit through the end of 2022

Child Tax Credits

Child tax credits that were previously available for children under the age of 17 in the amount of $2,000 have been expanded. The new credit allowed is $3,000 per child under age 18 and $3,600 per child under age 6. These amounts are currently only for 2021. The bill would extend these credits through 2022.

One more change is the credit is fully refundable. Under prior law, the credit was 70% refundable. If a family had a child eligible for the $2,000 credit but had no income tax liability, they would only receive $1,400 (70% of the $2,000 credit). If the family had an income tax liability of $500, they would be allowed a $1,900 credit ($500 vs. income tax and $1,400 refundable). If the tax liability were $600 or more, then this family would receive the full $2,000 credit. Under the new law, the family would receive the full $3,000 (or $3,600) regardless of whether or not they had an income tax liability. The new bill extends the refundability change indefinitely.

One important thing to keep in mind is the AGI limits.

The new law uses threshold amounts of $150,000 for joint filers, $112,500 for the head of household filers, and $75,000 for everyone else. Credits phase out at the rate of 5% for each dollar of AGI in excess of these limits.

While there are increased credit amounts the AGI limits may disallow this credit for some taxpayers that have been eligible in years 2018, 2019, and 2020.

Under the Tax Cuts and Jobs Act (passed in December of 2017), the $2,000 credits discussed do not phase out until AGI exceeds $400,000 for joint filers and $200,000 for everyone else. This is the law for the years 2018 through 2025. Therefore, taxpayers that exceed the AGI limits of the newly increased child tax credit will still be eligible for the $2,000 credit as long as they are under these much higher limits.

In other words, the new law expanded the child tax credit but did not take anything away from taxpayers that cannot use this expanded credit based on AGI.

Repeal of Denial of American Opportunity Tax Credit on basis of a felony drug conviction.

The American Opportunity is an education credit that allows an annual credit of up to $2,500 based on qualified expenses. This credit currently has a provision that does not allow the credit for anyone with a felony drug conviction. The bill eliminates this restriction for years beginning after December 31, 2021.

Modification of Limitation on deduction for State and Local Taxes (SALT)

The bill changes the current law which limits itemized deductions of state and local taxes to $10,000 ($5,000 in the case of a married individual filing a separate return) to $80,000 ($40,000 in the case of an estate, trust, or married individual filing a separate return). The bill also changes the sunset date from “through 2025” to through 2031.

Corporate Minimum Tax

There is a 15% Alternative Minimum Tax to be paid by C corporations with annual financial statement income for the 3-taxable-year period ending with such taxable year exceeding $1,000,000,000 beginning in years ending after December 31, 2021.

Repurchase of Corporate Stock

There will be a tax equal to 1 percent of the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year. This tax applies to any corporation that is traded on an established securities market.

Change in rules on sales of small business stock

For purposes of this code, section qualified small business stock is any stock in a C corporation that is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if— (A) as of the date of issuance, such corporation is a qualified small business, and such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)— (i) in exchange for money or other property (not including stock), or (ii) as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).

The current law allows an exclusion of 50 percent of any gain from the sale or exchange of such stock held for more than 5 years. This percentage increases to 75 percent for stock purchased after the enactment of the law and before September 27, 2010. For stock acquired after September 26, 2010, 100 percent is to be excluded.

Build back better disallows the 75% and 100% exclusions for taxpayers with adjusted Gross Income (AGI) equal to or exceeding $400,000 or if the taxpayer is a trust or an estate.

Wash-sale rules

Taxpayers that sell assets at a loss but repurchase substantially the same assets within 30 days before or 30 days after the sale of these assets will have their loss disallowed under the wash-sale rules. The build back better bill extends these wash sale rules to commodities, foreign currencies, and crypto-assets.

Changes to Net Investment Tax

The build back better bill assesses the 3.8% net investment tax on income derived in the ordinary course of a trade or business for taxpayers with taxable income over $400,000 ($500,000 for married filing jointly taxpayers and $250,000 for married taxpayers filing separately). This would include income derived from an S Corporation or Partnership. The current law does not apply the net investment tax to income derived in the ordinary course of business.

Excess business losses

The Tax Cuts and Jobs Act created a provision whereby losses in excess of $250,000 ($500,000 in the case of a joint return) of noncorporate taxpayers are disallowed. This number was to be indexed for inflation and sunset after 2025. The CARES Act repealed these limitations for years 2018, 2019, and 2020. The build back better bill would make this law permanent. Any losses disallowed would be carried forward to subsequent years.

Surcharge on High-Income Individuals

The bill would add a 5 percent surcharge to the Modified Adjusted Gross Income of a taxpayer exceeding $10,000,000 ($5,000,000 for married filing separately) and $200,000 in the case of an estate or trust.

Additionally, there would be a 3 percent surcharge to the Modified Adjusted Gross Income of a taxpayer exceeding $25,000,000 ($12,500,000 for married filing separately) and $500,000 in the case of an estate or trust.

Limitations on High-income Taxpayers with Large Retirement Account Balances

The bill disallows contributions to an IRA or Roth IRA that exceeds $10,000,000. The limitation applies to taxpayers with Modified Adjusted Gross Income exceeding $400,000 (single filers and married filing separately), $425,000 (heads of household), and $450,000 (married taxpayers filing jointly).

If a taxpayer’s combined traditional and Roth IRAs when added together with any defined contribution accounts exceed $10,000,000 at the end of the year and the taxpayer meets the income thresholds set out in the prior paragraph, then there would be a Required Minimum Distribution (RMD) required for the following year.

Both the limitation on contributions and the increased RMD provisions would be effective for years beginning after December 31, 2028.

Tax treatment of rollovers to Roth IRAs

The bill disallows all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA. In other words, any nondeductible IRAs or contributions to a qualified plan that were not deductible are not allowed to be converted to Roth IRAs. This would apply to all distributions, transfers, and contributions made after December 31, 2021.

The bill also 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 Dec. 31, 2031.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation