The House of Representatives passed the Build Back Better Act that includes many changes to the current US tax code, favoring many taxpayers in the way.
These tax changes will be active for the 2021 tax year, for which you’ll file a federal income tax return in 2022. The tax changes include improvements on state and local tax (SALT) deduction, child tax credit, and many more. Here is everything you need to know about the build-back better tax changes that will affect your taxes.
Build Back Better Child Tax Credit
The child tax credit has seen some improvements in 2021, increasing the total credit amount available to taxpayers and giving advance payments of the credit. These changes came with the American Rescue Plan Act and will continue for another year. That means taxpayers that qualify for the credit will receive payments in 2022 as well, which wasn’t originally planned this way with the American Rescue Plan.
SALT deduction limit
The Build Back Better Act allows taxpayers to deduct up to $80,000 for state and local taxes paid. This limit was previously at $10,000, giving the deduction a huge boost. One last thing to know about this is that taxpayers who are married but filing a separate return can deduct $40,000.
Minimum corporate tax
The new change imposes a minimum of 15 percent tax to corporations that report over $1 billion in profits to shareholders. However, this excludes S corporations, real estate investment trusts, and regulated investment companies per new Section 56A. So, no more large corporations taking advantage of the deductions and credits available to them and paying a significantly less amount in taxes.
Green energy incentives and electric vehicles
Starting from 2022, taxpayers who use renewable energy sources and drive electric vehicles will get tax benefits. You can now get a tax credit of up to $8,500 for the purchase of an electric vehicle. The best part is that this credit is refundable.
IRA account balance limits
Though this law is going to be in effect starting in 2029, it’s important to notice it. The Build Back Better tax changes impose a limit on further contributions to Roth IRA and traditional IRA retirement accounts if the total balance exceeds $10 million for the tax year. That said, you won’t be able to contribute a dime after the account balance reaches $10 million. However, this only applies to taxpayers with an income over $400,000 for single filers, $450,000 for married couples filing jointly, and $425,000 for heads of households.
On top of all these changes, there are minor changes that are worth taking note of. Here are other changes to the US tax code that comes with the Build Back Better Act.
- Amending Sec. 1202, disallowing the 75 and 100 percent exclusion of gains from the sale of stocks if the AGI is $400,000 or over, or if the taxpayer is an estate or trust.
- Amending Sec. 1091, making crypto assets, commodities, and foreign currencies subject to the wash-sale rules.
- Makes Sec. 461 limitation on noncorporate taxpayers’ excess losses.
While some of these changes don’t take into effect right away, some do start from 2022. Make sure to discuss with a professional tax consultant to see how these affect you, especially if you’re a large-scale business.