How Could The Build Back Better Act Affect 2021 Income Tax Returns?

Back on November 19th, the House passed an updated version of President Biden’s Build Back Better Act (the Act) and moved the $1.75 trillion legislative package to the Senate. As Congress proceeds with legislative negotiations, high-income individuals, estates, trusts, and businesses should plan for potentially significant changes ahead of filing 2021 income tax returns. 

While the Senate has tabled voting on the Act until after the break, when discussion does resume, it is likely to include a few changes. The Federal Government’s temporary funding expired on December 3rd, and the window ahead of a breach in the debt ceiling is rapidly approaching. Unfortunately, the House would have to vote once again if the Senate makes any changes, so it is unclear whether we will see a short-term extension or final legislation by the end of the year. 

Many previously proposed provisions remain in the House-passed bill, whether intact or in an amended capacity. For example, the Act expanded certain health care, housing, and green initiatives. However, a number of previously proposed changes in taxation are noticeably absent, including the proposed increases in the individual and corporate income tax rates and capital gains tax rates. Other items not included in the updated Act are the proposed changes to carried interest, elimination of Section 1031 exchanges, modifications to the 199A deduction for qualified business income (QBI), prohibition of private equity investments in IRAs, decrease of the Federal Estate & Gift Tax Exemption, and changes to the step-up in cost basis at death and grantor trust rules. 

We’re taking a look at some of the most significant changes the House presented in the latest version of the Act. Understanding what has changed, when these changes are set to take effect, and what else could be ahead can help you and your CPA ensure timely-filed, tax-efficient 2021 income tax returns. Because the majority of the proposed changes would take effect in tax years after 2021, it will also help you and your CPA incorporate contingencies and flexibilities into your long-term plan to accommodate changes that may become effective in the coming years. 

Potential Significant Changes Ahead for High-Income Individuals, Estates & Trusts  

Net Investment Income Tax (NIIT) - Beginning in tax years after 2021, income earned by taxpayers from an entity in which they participate materially as S corporation shareholders, limited partners, or LLC members would be subject to the 3.8% NIIT if they file jointly and have income in excess of $500,000; file as head of household or single and have income over $400,000; file as married filing separately and have income over $250,000.

High Income Surcharge - Beginning in tax years after 2021, the Act would impose a 5% tax on the modified adjusted gross income (MAGI) above $10 million for joint, single, or head of household filers; MAGI above $5 million for those married filing separately; and MAGI over $200,000 for estates and trusts. The Act would impose an additional 3% tax on MAGI in excess of $25 million for joint, single, and head of household filers; MAGI in excess of $12.5 million for those married filing jointly; and MAGI in excess of $500,000 for estates and trusts.

State & Local Tax (SALT) Deduction - Beginning in tax year 2021 and through 2030, the Act would increase the SALT deduction to $80,000 for individuals and to $40,000 for married individuals filing separately, trusts, and estates. 

Excess Business Losses - The Act would make the prohibition on the excess business losses of noncorporate taxpayers permanent.

Retirement - Effective for distributions, transfers, and contributions made after December 31, 2021, the Act would prohibit converting portions of after-tax traditional IRA to a Roth IRA. The Act would also eliminate Roth conversions for certain high-earning individuals in tax years after December 31, 2031, based on income thresholds.

Child Tax Credit - The Act would extend many of the modifications the American Rescue Plan Act (ARPA) made to the credit, including the full refundability of the credit and advance payment of the credit, to tax year 2022.

Health Care Credits - The Act would extend the temporary changes ARPA made to the premium assistance credit through 2025 and make the health coverage tax credit permanent and increase the amount to 80% of qualified health insurance premiums. 

Earned Income Tax Credit - The Act would extend the ARPA provision that increased the amount of the credit for taxpayers without children through 2022.

Residential Energy Incentives - The Act would extend the credit for residential energy-efficient property through 2033. It would also extend the credit for nonbusiness energy property through 2031 and replace the lifetime limit with an annual limit of $1,200.

Plug-in Electric Motor Vehicle Credit - The existing credit would be extended through 2031. The Act would eliminate the credit’s current limitation on the number of vehicles produced by a manufacturer, increase the base credit amount, and add new credits to include qualified pre-owned and commercial electric vehicles.

Potential Significant Changes Ahead for Businesses 

In addition to several changes affecting foreign-related and international taxation, the Act would make the following changes: 

Business Interest Expense - The Act would limit the net interest expense allowed as a deduction by specified domestic corporations beginning in tax years after 2022. This would apply to multinational groups that prepare consolidated financial statements with 

average interest expense of $12 million annually over the prior three years.

Research & Development Expenses - The Act would delay the requirement to amortize research and development expenses established under the Tax Cuts & Jobs Act (TCJA) until 2026.

Capital Losses - The Act would modify the tax treatment of losses to capital losses in the case of worthless securities or partnership interests. 

Corporate Alternative Minimum Tax - The Act revives a modified version of the corporate alternative minimum tax (AMT), which was eliminated by the TCJA. The corporate AMT would be effective for tax years beginning after 2022 and determined based on a multinational corporation’s worldwide book income. If the corporation’s average annual adjusted financial statement income exceeds $1 billion in the prior three tax years, their AMT liability would be equal to 15% of their adjusted financial statement income for the tax year, reduced by a corporate AMT foreign tax credit. 

Stock Repurchases - Under the Act, domestic corporations with publicly-traded stock would be subject to a 1% excise tax on stock repurchases made after 2021. 

Energy Investment Credit - The Act would extend the credit through 2033, with phasedowns in the last two years and workforce/wage credit enhancements.

Zero Emissions Facility - The Act would create a new 30% investment tax credit for qualified investments in qualified property that is part of a zero-emissions facility.

Contact Livingston & Haynes

Since this bill is not finalized, we will continue to watch its evolution as it makes its way through Congress. The team at L&H advises individuals, families, privately-held companies, nonprofit organizations, and healthcare providers on potential factors that could affect their financial health, such as existing, evolving, and new regulatory requirements and best practices for their particular situation. If you have questions about this legislative update, contact us today. 

by Steven J. Haynes, MBA

Steven Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for technology, entrepreneurial, and emerging growth firms.