Get the daily email about stock.

Please Enter Your Email Address:

By opting in you agree to our Privacy Policy. You also agree to receive emails from us and our affiliates. Remember that you can opt-out any time, we hate spam too!

Bull Trader USA

How the Build Back Better Act is giving high earners a one-year tax break

US Speaker of the House Nancy Pelosi, D-CA, speaks about the Build Back Better Act during her weekly press conference on Capitol Hill in Washington, DC, on November 18, 2021.

Jim Watson | AFP | Getty Images

The roughly $2 trillion climate and social policy measure House Democrats passed Friday would create a fluid tax scenario for households over the next few years, as tax provisions affecting low and high earners phase in and out.

The Build Back Better Act has tax components related to children, health care, education, state and local taxes, corporate profits and retirement plans, among others.

But their start dates and duration differ — a dynamic that may have a big impact on taxpayer levies from year to year, according to projections.

More from Personal Finance:
How to maximize year-end tax planning after a layoff or early retirement
Here’s how Medicare could change if Build Back Better becomes law
Year-end tips to lower your tax bill or boost your refund

“It’s sort of a roller-coaster ride when it comes to a net tax change for folks, both at the bottom and at the top,” said Garrett Watson, a senior policy analyst at the Tax Foundation.

That legislative roller coaster is similar to a 2017 tax law passed by the Republican-controlled Congress, Watson said. That law enacted many temporary tax cuts for individuals and households that are slated to expire after 2025.

Taxing the wealthy

President Joe Biden and Democratic legislators are aiming tax increases at households with more than $400,000 of annual income, or the top 1% to 2% of the population, to support investments largely for low and middle earners.

The House-passed legislation would raise taxes on high earners by about $640 billion over a decade, according to an estimate published Friday by the Joint Committee on Taxation, Congress’ tax score keeper.

However, in the legislation’s first year, it would deliver a larger relative tax cut to Americans with more than $1 million in income than those who earn $75,000 to $1 million, according to the Joint Committee estimate.

The highest earners would see their tax bill fall by a total $46.8 billion, or 5.4%, in 2022 relative to current law. Those with $100,000 to $200,000 of income, for example, would see a smaller relative tax cut, of 3.2%. Those making less than $75,000 would get a bigger cut than the richest taxpayers.

(These are averages across all taxpayer groups, meaning an individual household’s experience may diverge from these figures.)

The House legislation, which may change in the Senate, would impose a 5% surtax on income of more than $10 million and another 3% over $25 million starting in 2022. It would also raise taxes on some business owners.

However, the wealthy would get a break on state and local taxes next year. Households could deduct up to $80,000 of state and local taxes from the federal tax bill — a significant increase from the current $10,000 cap.

On average, that change would help override higher taxes on the wealthy from the other measures, according to tax experts. About three-fourths of the SALT relief would go to the richest 5% of taxpayers in 2022, according to the Institute on Taxation and Economic Policy.

Low and middle earners would get tax cuts from expansions to the child tax credit and earned income tax credit, with the biggest benefits accruing largely to the lowest earners.

They would also get financial relief from expanded premium tax credits, which generally make health insurance purchased on a state or federal marketplace more affordable.

Different dates

However, the tax dynamic shifts after 2022. New tax provisions affecting the wealthy will kick in and temporary tax cuts for low and middle earners will end, absent future extensions from Congress.

“In some ways, the bill’s effects on taxes in 2022 is not representative of how it would change our tax code,” according to the Institute on Taxation and Economic Policy’s analysis.

For example, the expanded child and earned income tax credits expire after one year.

In 2023, households earning $50,000 to $75,000 would roughly break even, after having gotten an 8.6% tax cut the year prior, according to the Joint Committee on Taxation projection.

Those making less than $50,000 would still get an average tax cut from some other measures, such as the expanded premium tax credits, which expire after 2025. The legislation also delivers an entrenched benefit to the lowest earners by making the child tax credit permanently refundable.

Higher taxes on corporate profits starting in 2023 are also projected to largely affect the highest-income taxpayers. (This would be via a 15% corporate alternative minimum tax.)

The tax’s effect would be indirect — if corporate stock and bond values fall due to the higher corporate tax levies, the dynamic would predominantly affect the wealthy, who overwhelmingly own such assets, Watson said.

In 2023, for example, the wealthiest Americans would see their taxes rise 5.1%, after having been cut more than 5% the year prior, according to the Joint Committee estimate.

Further, in 2031, the cap on the state and local tax deduction would revert to $10,000 from $80,000. Many wealthy taxpayers would incur larger tax bills that year since they’d be able to write off a much smaller amount of tax.

Post a Comment