We’re continuing our breakdown of tax implications from Biden’s Build Back Better Budget, we’ve made it through business provisions, international provisions, and are now touching upon individual implications. The original proposal included increases to the top income tax rate and an increase on the top capital gains tax rate which were set to target wealthier individuals, specifically those earning over $400,000, however, these provisions were cut in the latest proposal. Let’s jump right in and see what individuals can expect this coming tax year.
Individual Provisions
Income Tax Surcharge
In place of the increases to top tax rates is a new two-stage surcharge on the modified adjusted gross income of individuals, estates, and trusts. A tax of an additional 5% would be applied to the modified adjusted gross income of a joint filer, single filer, and head of household in excess of $10 million. This surcharge would also apply to a married taxpayer filing separates at $5 million and to estates and trusts at $200,000. There will also be an additional 3% tax tacked on for joint filers, single filers, and heads of households if their modified adjusted gross income is in excess of 15$ million. Similarly, the 3% tax would also apply to married taxpayers filing separately at $12.5 million and to estates and trusts at $500,000. This surcharge is set to be applied to tax years beginning after 2021.
Net Investment Income Tax
The legislation proposed is also set to expand the scope of taxpayers who will be subject to the net investment income tax. Currently, taxpayers who are S-Corp. shareholders, limited partners, and LLC members are not subject to the net investment income tax on income received from these entities because they participate in the trade or business. Under the new proposal the 3.8% tax would be applied at certain income thresholds dependent upon filing status; $500,000 for joint filers, $400,000 for heads of household and individual filers, and $250,000 for married taxpayers filing separately. This proposal would take effect for the tax years beginning after 2021.
Excess Business Losses
Under the proposed legislation excess business losses of a noncorporate taxpayer would become permanent. They were previously set to expire in 2026.
Individual Credits
A large focus of Biden’s Build Back Better Act was to expand public assistance through many different no-tax and tax programs. For the most part, we see the largest push for these through the expansion and modifications of tax credits.
Child Tax Credit
There were significant modifications to the Child Tax Credit this year to help parents combat the negative economic effects of COVID in 2021, however, the proposed legislation would expand some of these modifications into 2022. These extended modifications include full refundability of the credit, advanced payment of the credit, an increased age limit for qualifying children, increased amount of the credit to $3,000 ($3,600 for children under 6), and a two-stage phaseout of the credit amount. Additionally, the proposal will extend the full refundability of the credit past 2022, however, it does not provide advance payments past next year.
Health Care Credits
There is a reduced share of premiums that individuals or heads of households must contribute to the cost of health insurance in calculating the amount of their premium assistance credit. The general eligibility has also been expanded for the premium assistance credit to individuals and families with a household income 400% above the federal poverty line. Additionally, the health coverage credit has been made permanent under the proposed bill. The credit was also increased by 80% of qualified health insurance premiums from its current rate of 72.5%.
Questions on how these changes are going to affect you? Give us a call at 516-541-6549 now to discuss!