President Biden has proposed a significant set of laws meant to improve many Americans’ lives. However, the provisions may be especially beneficial for red states, including here in Texas, where poverty affects many of our citizens.
The $2 trillion Build Back Better program aims to help lower-income families while increasing the tax duties for wealthy Americans and businesses. Many tax provisions will affect both personal taxes and business taxes.
Continue reading below to learn about the Build Back Better plan and how it could affect you or your business this tax season.
What Is The Build Back Better Program?
The Build Back Better program is a framework proposed by President Joe Biden that seeks to invest in social initiatives, infrastructure, and environmental protection. It consisted of the American Rescue Plan (ARP), American Jobs Plan (AJP), and American Families Plan (AFP).
The ARP was signed into law in March 2021 and provided economic relief in response to the COVID pandemic. Parts of the AJP were passed into law in the Infrastructure Investment and Jobs Act in November 2021. Finally, the Inflation Reduction Act was passed in 2022, which includes some of the healthcare, environmental, and tax reform proposals of the Build Back Better Act.
Many people view the Build Back Better program as too ambitious, but President Biden continues to try to get his original framework passed. Let’s look at how the updated Build Back Better Act could affect individuals and businesses.
How Does the Build Back Better Program Affect Personal Taxes?
Below are some of the primary Build Back Better provisions that can affect personal taxes.
EITC and CTC Expansion
One of the primary points in the Build Back Better plan is the expansion of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). The framework follows up on the ARP by extending EITC eligibility and full CTC refunds through 2022. It also seeks to permanently make the CTC refundable, which can help low-income families with children.
The CTC would equal $300 per month per child under six years old or $250 per month per child between six and 17. These payments are meant to help lower-income families pay for housing, food, healthcare, and more.
Increased Tax Rates and Enforcement for High-Earning Americans
In addition, Build Back Better taxes the wealthiest Americans more. Individuals would have to pay five percent on income over $10 million and an additional three percent on income over $25 million. The framework also closes tax loopholes that allow some high-income Americans to avoid paying their 3.8 percent Medicare tax.
The original Build Back Better framework also includes provisions to help lower-income families get tax help and build the IRS’ ability to audit high-income Americans and enforce tax law.
IRA Contribution Limitations
Finally, one of the last major personal tax provisions changes the requirements for IRA contributions. Since IRA contributions are made with pre-tax income, Build Back Better limits how much an individual can contribute once their balance hits $10 million. It also advances those accounts’ distributions and, therefore, when that income can be taxed.
How Does the Build Back Better Program Affect Business Taxes?
Below are some of the primary Build Back Better provisions that can affect business taxes for pass-through entities and corporations.
Current tax law includes a 3.8 percent Net Investment Income Tax (NIIT) for pass-through businesses on some portfolio income and passive income. However, the NIIT would be expanded to include active business income as well.
Limits Excess Business Losses
The Tax Cuts and Jobs Act (TCJA) currently limits pass-through businesses from claiming more than $250,000 (or $500,000 for joint filers) in business losses. The Build Back Better Act would make this permanent. In addition, the TCJA allows business owners to carry excess business losses forward separately from the current year’s loss. However, the Build Back Better plan would combine excesses from previous years with the current tax year’s business loss.
Increased Tax Rates for Corporations
The Build Back Better program will create tax provisions that increase how much big corporations need to pay. The framework will increase the minimum tax rate for corporations that report over $1 billion in profit to their shareholders. The rate will increase from 8% to 15% starting in the tax year beginning in 2023.
Taxes on Stock Buybacks
Corporations will also be required to pay a 1% tax on stock buybacks, except when those stocks are used to invest in employees. For example, stocks that are used to contribute to retirement accounts, pension plans, or employee stock ownership plans (ESOPs) would be excluded from the tax.
What Other Effects Does Build Back Better Have?
The Build Back Better framework includes the following provisions:
- The requirement to amortize research and development (R&D) expenses over five years will be delayed until after 2025.
- Tax credits will be created and extended for green energy and other environmental efforts.
- The Superfund tax on crude oil will be reinstated at 16.4 cents per barrel. The Superfund tax on the sale of chemicals will be doubled.
- A federal excise tax will be placed on nicotine at $50.33 per 1,810 milligrams.
The Build Back Better plan focuses heavily on environmental programs, so these tax changes have been proposed to encourage individuals and businesses to focus on green energy.
The overall aim of the Build Back Better program is to build a tax system that helps the lower and middle classes, prevents high-income individuals and businesses from not paying taxes, and encourages social and environmental improvements.
While some parts of the Build Back Better plan have been passed, there are others that President Biden would still like to see passed in the future. However, they must be negotiated and may be adjusted to meet the demands of both parties as best as possible.
In the meantime, if you need help understanding your tax requirements or how to plan for your financial future under the Build Back Better program, contact Bennett Bennett & Trice today.