Back-to-School College Tax Breaks for 2021August 3, 2021
Social Security wage base, COLA set for 2022November 2, 2021
On September 15, the House Ways and Means Committee approved the tax provisions of the Build Back Better Act (BBBA), the legislation intended to implement President Biden’s social and education reforms.
A few of the major tax items in the Act are listed below:
- Increase in the top marginal individual income tax rate – The top marginal individual income tax rate would increase to 39.6%, the same top marginal rate that existed before the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA).
- Increase in the maximum long-term capital gains rate – The maximum capital gains rate would increase to 25% from the current rate of 20%. The income level that this capital gains rate bracket applies to would be aligned with the new 39.6% rate bracket. These rates would also apply to qualified dividends.
- Net investment income tax applies to active business income – Under current law, the net investment income tax applies an additional 3.8% tax to a taxpayer’s net investment income when adjusted gross income exceeds a certain threshold. Net investment income only includes income earned from a business if the taxpayer is passive with respect to that business, but not if a taxpayer is active. The proposal would subject active business income to the net investment income tax as well, but only when adjusted gross income exceeds (1) $500,000 for a married couple filing jointly, (2) $250,000 for married couples filing separately, and (3) $400,000 for all other taxpayers. This rule would not apply if the business income was already subject to self-employment tax.
- Limitations on contributions to IRAs and increases in required minimum distributions (RMDs) for certain high-income taxpayers with large account balances – Under current law, taxpayers can make contributions to certain retirement accounts regardless of their income level. The bill would prohibit contributions when the total balance of the contributor’s IRAs and other retirement accounts exceeds $10 million (determined as of the close of the previous taxable year) and taxable income exceeds (1) $450,000 in the case of a married couple filing jointly or (2) $400,000 in the case of single or married taxpayers filing separately. Those same taxpayers would have to take an RMD equal to 50% of the value that exceeds $10 million, plus 100% of any amount exceeding $20 million.
- Limitations on “back door” Roth IRA conversions – Under current law, while contributions to Roth IRAs may not be made by taxpayers with incomes exceeding certain thresholds, those taxpayers may effectively avoid the limitations by first making a nondeductible contribution to a traditional IRA and then converting it to a Roth IRA. The bill would prohibit this practice for taxpayers with taxable income exceeding (1) $450,000 in the case of married taxpayers filing jointly or (2) $400,000 in the case of single taxpayers and married taxpayers filing separately.
There are several other provisions that could have tax implications, and we will certainly track this bill as it makes its way thru the legislative process. Stay tuned!