Knowledge and Insights
Proposed changes to tax laws, and recently released draft legislation from the House Ways and Means Committee, have the potential to directly impact individuals. In addition, the IRS is allocating $78 billion for enforcement activities toward taxpayers whose income is $400,000 or more. It is important that taxpayers understand and prepare for this proposed legislation.
Below are brief explanations of the proposed changes as of the most recent version of HR 5376 (The Build Back Better Act – as of October 28, 2021) and how they could impact personal income tax planning, retirement plans, and other aspects of wealth management.
This briefing was assembled by the team of tax experts and specialists at Mercadien. We help our clients navigate through disruption, and proposed changes to tax law will be disruptive for many individuals and businesses. For assistance or consultation, contact Mercadien online or by calling 609-689-9700.
Here is what you need to know:
5% Tax Surcharge on High-Income Individuals
The House Ways and Means Committee has proposed a 5% surcharge tax, applicable to modified AGI in excess of $5 million for MFS, $200,000 for estates and trusts, and $10 million for other filers. The effective date is after December 31, 2021.
Net Investment Income Tax Applies to MAGI That Exceeds $500,000
The net investment income tax will now include income derived from ordinary business or other gross income and net gains, even if earned outside of a passive activity. This will apply to modified adjusted gross income that exceeds $500,000 for MFJ and surviving spouses, and $250,000 for MFS. The threshold is $400,000 for all other filers.
A few additional IRA changes are included in the proposals:
- IRAs would no longer be allowed to hold securities that have specific taxpayer requirements, such as specified minimum amount of income, education requirements, or special licenses/credentials.
- An increase in the statute of limitations from three years to six years for substantial errors or prohibited transactions/IRA noncompliance.
- Prohibited transaction rules expanded when the IRA invests in closely held family businesses, if the IRA has controlling interest, and any entity where the IRA is an owner or director, as mentioned above.
Several new credits are included in these proposed changes, including:
- Making the modifications to the child and dependent care tax credit permanent, with a phased threshold beginning at $125,000 (rather than $15,000) and going up to $500,000.
- A one year extension of the child tax credit, and increase of the safe harbor amount to $3,000. It would also establish a monthly refundable CTC with advance payment through 2025.
- Creating a credit of up to $4,000 for half of qualified caregiver expenses, applicable to taxpayers with $75,000 to $200,000 of adjusted gross income.
- Replacing the existing electric vehicle credit with a refundable credit for qualifying vehicles between $4,000 and $12,500, not to exceed 50% of the vehicle purchase price. This will be available for taxpayers at the following income thresholds: $400,000 (all filers), $600,000 (HOH), or $800,000 (MFJ and surviving spouse). The credit will be available for qualifying vehicles acquired after December 31, 2021 and before January 1, 2032.
There are important planning considerations to prepare for the potential law changes including accelerating income strategies and managing deductions. These strategies should be considered now before the law is passed. It is important that you as an individual are prepared: our team at Mercadien is well-equipped to assist you through these changes.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.