Individual Provisions
Ordinary Income Tax Rates: Currently, individual ordinary income is taxed at seven graduated rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For 2022, the 37% bracket is projected to begin at the following income levels, depending on filing status:
Under the proposal, the 37% rate bracket is eliminated and replaced with a 39.6% bracket, which also begins at a lower threshold amount:
Capital Gain Rates: Under the proposal, the top 20 percent rate would be replaced with a 25 percent rate. Additionally, the “breakpoint” for the beginning of the new 25 percent bracket would be lowered to align with the income amounts applicable for the new 39.6 percent ordinary income bracket.
Income Tax Surcharge: The proposed legislation would apply a three-percent tax on the modified adjusted gross income of individuals, estates, and trusts in excess of certain amounts. For single filers, heads of households, and joint filers, that threshold amount is $5 million. For married taxpayers filing separate returns, it is $2.5 million. For estates and trusts, it is $100,000.
Net Investment Income Tax: The proposed legislation expands the scope of taxpayers subject to the net investment income (NII) tax. Effectively, taxpayers who are S corporation shareholders, limited partners, and LLC members not currently subject to the NII tax on income received from these entities because they materially participate in the trade or business would no longer be exempt from the 3.8 percent tax.
Qualified Business Income Deduction: For tax years beginning after 2017 and before 2026, taxpayers are allowed a 20 percent deduction on the qualified business income from an S Corporation, partnership, or sole proprietorship, subject to limitations based upon the taxpayer’s taxable income.
Excess Business Losses: Under the proposed legislation, the prohibition on the excess business losses of a noncorporate taxpayer, currently applicable through 2026, would be permanent.
Individual Credits
A significant focus of the Build Back Better Act is the expansion of the social safety net. While this takes the form of many non-tax programs expanding health and education resources, there are tax-related programs as well.
Child Tax Credits: ARPA significantly modified the child tax credit in several ways, but only for 2021. The proposed legislation extends many of those modifications to 2022, including:
• Full refundability of the credit
• Advance payment of the credit (for the full year instead of six months)
• Increase in the amount of the credit to $3,000 ($3,600 for children under six)
• Expansion of the expensing treatment for qualified film, television, and live theater productions to qualified sound recording productions
• Allowance of the credit to U.S. possessions
Child and Dependent Care : ARPA also expanded the child and dependent care credits but only for 2021. The amount of the credit was increased to $8,000 for taxpayers with one qualifying individual and $16,000 for those with two or more, and it was made fully refundable.
Earned Income Tax Credit: ARPA also significantly expanded the scope of the earned income tax credit (EITC). While some of the EITC provisions of the legislation were permanent, those that increased the amount of the credit for taxpayers without children were for 2021 only. The proposed bill would make the increased EITC for childless taxpayers permanent.
Health Care Credits: ARPA reduced the share of premiums that individuals or households must contribute towards the cost of health insurance in calculating the amount of their premium assistance credit.
