Tax Memo – Build Back Better Act | Individual Tax Impact

Income Tax Surcharge

In lieu of income tax rate increases on the top tax bracket, the bill includes a new, two-stage surcharge on the modified adjusted gross income of individuals, estates and trusts. An additional tax of five percent applies to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust). An additional three percent tax applies to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $25 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). The surcharge would apply in tax years beginning after 2021.

Net Investment Income Tax

The bill expands the scope of taxpayers subject to the net investment income (NII) tax. Effectively, taxpayers who are S corporation shareholders, limited partners, and LLC members not currently subject to the NII tax on income received from these entities because they materially participate in the trade or business would no longer be exempt from the 3.8 percent tax. This change only applies to joint filers with income in excess of $500,000 ($400,000 for heads of households and single filers; $250,000 for married taxpayers filing separate returns). The provision is effective for tax years beginning after 2021.

Excess Business Losses

Under the bill, the prohibition on the excess business losses of a noncorporate taxpayer, currently applicable through 2026, would be permanent.

SALT Deduction

The deduction for state and local taxes was capped at $10,000 ($5,000 for married taxpayers filing separately) through 2025 by the Tax Cuts and Jobs Act. The bill increases the cap to $80,000 ($40,000 for married taxpayers filing separately). The newly increased cap would be extended through 2030, with a return to the $10,000 cap in 2031.

Child Tax Credit

ARPA significantly modified the child tax credit in several ways, but only for 2021. The bill extends many of those modifications to 2022, including:

• Full refundability of the credit;
• Advance payment of the credit (for the full year instead of six months);
• Increase in the age limit of a qualifying child;
• Increase in the amount of the credit to $3,000 ($3,600 for children under six);
• Two-stage phaseout of the credit amount and the increased credit amount; and
• Allowance of the credit to U.S. possessions.

The bill also extends the full refundability of the credit to tax years after 2022, but does not provide for any monthly or advance payment of the credit, nor an extension of the increased credit amount.

Earned Income Tax Credit

ARPA also significantly expanded the scope of the earned income tax credit (EITC). While some of the EITC provisions of the legislation were permanent, those that increased the amount of the credit for taxpayers without children were for 2021 only. The bill would extend the increased EITC for childless taxpayers to 2022.

Health Care Credits

ARPA reduced the share of premiums that individuals or households must contribute towards the cost of health insurance in calculating the amount of their premium assistance credit. It also generally expanded eligibility for the premium assistance credit to individuals and families with household incomes above 400 percent of the federal poverty level for a family of the size involved. These provisions in ARPA were for 2021 only, but the bill extends the changes through 2025. Other changes to the premium assistance credit are also included in the bill.

The health coverage tax credit, set to expire for months beginning on or after January 1, 2022, is also made permanent under the bill. The amount of the credit is also increased to 80 percent of qualified health insurance premiums from the current 72.5 percent.

IRA Prohibited Transactions

The bill makes the receipt of any commission or other payment from an entity, any stock or interest in which is owned by the individual for whose benefit the IRA is maintained by an account that holds a DISC or FSC, a prohibited transaction, effective for stock and other interests acquired or held on or after December 31, 2021.