Every American has lamented the failing tax code for years. Now that another tax reform is on the horizon, what does it mean for you?
Last month, the U.S. House of Representatives released the proposed tax legislative package. This proposal aims to fund the ambitious Build Back Better Act brought forth by President Joe Biden.
The 10-year Build Back Better agenda aims to make the tax code fairer by taxing the wealthy more and ensuring large enterprises pay their dues. The legislation, as originally proposed by the Biden administration, would require $3.5 trillion to cover all planned reform, subsidies, and provisions.
The major provisions of the Build Back Better Act allegedly focus on bringing down costs, creating more jobs, and cutting back taxes.
Here are several key points and possible tax policy changes to familiarize yourself with.
Income taxes would go up under the proposed bill. The proposal plans to cut taxes for workers without any children by bringing up the earned-income tax credit from $543 to $1,502.
The top individual income tax rate for single filers earning more than $400,000 and joint filers earning over $450,000 would go up from 37% to 39.6%. If the bill is passed, this would take into effect starting in 2022.
Non-corporate, single taxpayers with a modified adjusted gross income over $5 million would also be subjected to a 3% surtax. The surtax would also apply to joint filers earning at least $2.5 million.
Capital gains taxes would increase if the proposed legislation is ratified. Top-bracket long-term capital gains and qualified dividends would then be subjected to a tax rate of 25%. If the bill is passed, the higher tax rate would apply for capital gains recognized after September 13, 2021.
Another possible change would be a longer holding period for carried interest. As of now, the proposal is to raise it to five years, from the current three.
Right now, non-corporate taxpayers can get up to 20% deductions on “combined qualified business income.” Under the proposed law, though, the maximum deduction may be limited based on the total business earnings.
Qualified business income deductions may also soon be capped at the following amounts:
- $500,000 for married, joint filers earning at least $2.5 million
- $400,000 for single filers earning at least $2 million
- $250,000 for married, separate filers earning at least $1.25 million
The bill proposes applying the additional 3.8% net investment income tax onto active business income based on certain thresholds. Though the tax rate did not increase and only expanded, this would apply on top of your individual tax rate and the high-income surcharge.
As such, the total tax rate that would apply for your active business income would increase by almost 10% — from the current 37% to 46.4%.
The basic exclusion amount for estate and gift taxes could go down to $6.02 million starting 2022. The basic exclusion amount refers to the maximum amount you can pass or transfer to your beneficiaries without any gift or estate tax.
Right now, estate and gift tax exemption only apply to figures exceeding $11.7 million. As such, if you plan on bequeathing more than that amount, it’s best to restructure your estate plans before the year ends.
Individual retirement accounts (IRA) are also subject to new limitations under the proposed legislation. However, this would only apply to high-income taxpayers.
Under the proposal, your retirement contributions would be capped if the total balance of your IRA and other retirement accounts is over $10 million. You would also need to take required minimum distributions equivalent to 50% of the amount exceeding $10 million.
If the proposal is passed, all these changes would take effect by 2022.
Many of these provisions pose significant changes and may impact your budget planning. As of now, all of these provisions are still only proposed legislation and are subject to further revisions.
However, the current proposal can serve as a great benchmark for coming changes to the tax code. While keeping track of the proposed legislation’s journey through Congress, make sure to review your finances and circumstances in preparation.
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