Income Tax Surcharge
In lieu of income tax rate increases on the top tax bracket, the Build Back Better Act 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.
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.
Residential Energy Incentives
The credit for nonbusiness energy property is modified and extended through 2031 by the proposal. This credit applies to energy efficient windows and doors, and the lifetime maximum for the credit is replaced with an annual limit of $1,200. The residential energy efficient property credit is also extended through 2033.
Plug-in Electric Vehicles
The credit for the purchase of plug-in electric vehicles is extended through 2031, and enhanced, under the bill. The bill eliminates the current credit’s limitation on the number of vehicles produced by a specific manufacturer. The base amount of the credit is also increased, with further increases for vehicles and batteries produced at certain U.S. facilities such that the maximum amount of the credit is $12,500.
A new credit of up to $2,500 is also provided for the purchase of a previously-owned plug-in electric vehicle, as well as a new credit for up to 30 percent of the basis of a qualified commercial electric vehicle placed in service after 2021 and before 2032COMPLIANCE AND IRS ENFORCEMENT
Compliance and IRS Enforcement
A significant strategy in coming up with ways to pay for a large legislative package is by improving IRS service to close the so-called tax gap. The tax gap is the difference between what should be collected by the IRS and what is actually collected by the IRS. In many cases, the lack of resources by the IRS to enforce the nation’s tax laws can be leveraged by taxpayers to lower their tax bills, and it is believed that a small investment in IRS resources can lead to an outsized increase in revenue.
The bill looks to close the tax gap by allocating an increased amount to the IRS to improve enforcement. The bill also would apply backup withholding rules to third party settlements. Finally, the bill proposes to allow the IRS more freedom in assessing certain penalties.
Source: CCH Tax Briefings 11/19/21