Build Back Better Act: What’s In, What’s Out
In early November, Hook Law Center hosted a webinar on year-end tax planning for individuals and estates. During the webinar, we discussed the tax aspects of President Biden’s Build Back Better Agenda and the legislation pending in the House of Representatives. Since our webinar, the House passed the Build Back Better Act (the “Act”) on November 19, 2021. Here’s an update on what’s in the legislation sent to the Senate that must still go through the budget reconciliation process.
Child Tax Credit
The Act passed by the House extends the expanded Child Tax Credit through 2022. The American Rescue Plan (passed in March of this year) increased the Child Tax Credit from $2,000 to $3,000 per child up to age 17 and $3,600 for children under age 6 for tax year 2021. The credit was also made fully refundable (previously it was only partially refundable). The Act extends the credit for an additional year, through 2022 and makes the Child Tax Credit fully refundable on a permanent basis.
State and Local Tax Deductions
Those in higher tax state will be happy to hear that the Act increases the $10,000 limit on deductible state and local income taxes to $80,000 for tax years 2021 through 2030. In 2031, the limit will return to $10,000, then expire.
Net Investment Income Tax (NIIT)
The NIIT is a 3.8% tax on net investment income of individuals, estates and trusts with income above certain thresholds. Investment income includes interest, dividends, capital gains, rental and royalty income.
Pass-Through Business Taxes. Currently, trade or business income earned by an individual that materially participates in a given business (generally, that spends 500 hours or more per year on that business) is not subject to the 3.8% tax on net investment income. This exception is eliminated, and all trade or business income is subject to the 3.8% tax. This new NIIT on trade or business income applies to taxpayers earning more than $400,000 annually ($500,000 for married filing jointly; $13,050 for trusts).
More interesting are the items left out of the Act:
Top Individual Tax Rate
The top marginal tax rate for individuals will remain at 37% rather than the proposed 39.6%.
Capital Gains Rates
The top capital gains tax rate will remain at 20% rather than the proposed increase to 25%.
Gift, Estate, and GST Exemptions
The initial proposals cut in half the gift, estate, and generation-skipping transfer tax exemptions. The exemption amounts will remain at their current level of $11.7 million for 2021 and $12.06 for 2022. These exemptions will still drop to $5 million plus an inflation adjustment beginning in 2026
Hook Law Center will continue to provide updates as the Senate considers the legislation under the budget reconciliation process.
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