By Judy Mason, CPA, CVA, CEPA – Partner
On November 19th, the House passed the roughly $2 trillion Build Back Better Act. The bill includes income tax changes, expansion of current tax credits, support for health care, and measures to battle climate change. The Senate is in the process of reviewing the bill with the goal to have it completed before the end of the year.
Income Tax Changes:
- Expansion of individual income tax rates at higher thresholds. There would be a 5% increase to the tax rate for income above $10 million and an 8% increase on income over $25 million. This increase would apply to any type of taxable income, including capital gains, and it could significantly impact asset and business sale transactions.
- The current limit on the deduction for state and local taxes was raised from $10,000 to $80,000.
A new 15% corporation minimum tax which would be imposed on large corporations with more than $1 billion in corporate profits reported to shareholders - A 15% country-by-country minimum tax on foreign profits of U.S. corporations to minimize the tax benefits of shifting profits and jobs offshore. This aspect came about as part of a multinational agreement. If a foreign country does not abide by this agreement, a penalty rate would be imposed on a foreign corporation with U.S.-sourced income.
- A 1% surcharge on certain corporate stock buybacks
- The 3.8% Net Investment Income Tax would apply to income generated from both passive investments and active business income from pass-through entities such as LLCs, partnerships, and S corporations. This would apply to taxpayers with income above $400,000.
Benefits for Families and Children:
- Extension of the increased Child Tax Credit that was created under the American Rescue Plan (ARP) with features that allow for the continuation of advance payments permanently.
- The amount parents pay for child care would be capped to ensure no family pays more than 7% of their household income. The Act also includes funding for states to start and grow universal pre-kindergarten for three and four-year-old children.
- The bill provides four weeks of paid parental and medical leave starting in 2024 for workers who do not receive the benefit from their employers.
Investments in Clean Energy and Climate Change:
- The consumer EV tax credit of $7,500 would be made refundable and expanded by $4,500 for cars assembled domestically by plants represented by unions. An additional $500 bonus would be added for vehicles that use batteries made in the U.S. The legislation also creates a new $4,000 tax credit for the purchase of used electric vehicles.
- Expansion of tax credits for renewable power, electric vehicles, biofuels, and energy efficiency. The credits could accelerate investments in both utility-scale and residential clean energy as well as electricity transmission, power storage, and clean-energy manufacturing.
Affordable Care Act and Other Health Care Benefits:
- The bill would empower the government to negotiate with pharmaceutical companies on drugs that have been on the market for at least seven years, or longer for more complex medicines. Drug makers would be required to rebate the government for raising the price of their product above the pace of inflation, starting in 2023.
- Premium subsidies under the Affordable Care Act would be increased thru 2025 and would offer a new tier of low-cost plans to people in the 12 states that have declined to expand their Medicaid programs under the ACA.
- Expand Medicare to cover hearing services for seniors.
Also included is an increase to the IRS budget to enable the hiring of enforcement agents and for modernizing outdated IRS technology. There would also be funds to invest in IRS taxpayer services so that taxpayers can have their questions answered and access the benefits to which they are entitled.
Notably, this bill excludes a change to the corporate tax rate from 21% to 26.5% and the increase in the long-term capital gain rate from 20% to 25% or the highest ordinary income tax rate for income above $1 million. Also excluded were changes to the estate and gift tax lifetime exemption and to the rules affecting grantor trusts.
House passage of this bill is only the first step in the process. This legislation is likely to undergo many changes in the Senate before it is finalized. We will continue to monitor its progress. If you have questions about the potential tax implications of the Build Back Better Act, please contact your MichaelSilver tax professionals at 847.982.0333. We are here to help.
Judy Mason, CPA, CVA, CEPA – Partner, has over 20 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners and families. Her expertise is in federal, state and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements, and litigation support.