Recently, a New Year has often meant new tax laws. As we wish our clients, colleagues and friends a Happy New Year we also wanted to share some of the changes from the past year for the 2021 Tax Year.
Three new Acts have been passed and discussed in the past year:
American Rescue Plan (ARP) Act
The American Rescue Plan Act of 2021 (also called the COVID-19 Stimulus Package) is a $1.9 trillion economic stimulus bill passed on March 11, 2021. The intent of the Act was to speed up the United States recovery from Covid pandemic and recession and to boost the economy. The Act includes numerous tax changes to credits that are relevant to many of our clients.
1. A third stimulus payment of up to $1,400 per individual
2. Increase of the child tax credit from $2,000 to $3,000-$3,600 (depending on age)
a. Only applies to U.S. residents (must live in the U.S. six months plus one day during the year)
b. In many cases, the IRS started making prepayments of this credit in July. Our previous newsletter discussed how to opt out of the prepayment for foreign residents that are not eligible for the credit. For anyone that did not opt out, it is possible they will need to repay the credit with their 2021 tax filing
3. Increase of Earned Income Tax Credit
a. Only applies to U.S. residents (must live in the U.S. six months plus one day during the year).
b. For low-income families
4. Changes to Child and Dependent Care Assistance
a. Credit is now refundable, however refundable portion only applies to U.S. residents (rats!!)
b. Eligible expenses per child increase from $3,000 to $8,000
c. The credit phases-out for higher income
Bipartisan Infrastructure and Jobs Act (BIJA)
The Bipartisan Infrastructure Bill is a $1.2 trillion economic stimulus bill passed on November 15, 2021. The BIJA includes spending related to federal-aid highway and other transportation and safety measures, as well as broadband access, clean water, electric grid renewal and much more (apparently you can buy a lot with $1.2 trillion!).
While various tax changes were discussed, in the end BIJA has limited tax implications.
Build Back Better Act
The Build Back Better Act was reduced from $3.5 trillion to only $2.2 trillion and includes provisions related to climate change, social policy, spending and – of course – taxes. The bill was passed by the House on November 19, 2021 but is now facing new opposition in the Senate (thank you Joe Manchin!) and will be voted on in January 2022. Nothing is finalized yet and there could be changes, but for now the bill includes many tax changes that will be relevant to some clients.
1. No change to individual tax rates
2. No change to estate or gift tax
3. Add a high-earner surcharge
a. 5% on income over $10 million ($5 million if MFS) and an additional 3% on income over $25 million ($12.5 million if MFS)
b. Trusts and estates start at much lower levels….income over $200,000 for trusts and $500,000 for estates
4. Extend the Net Investment Income Tax (NIIT) to include certain income earned in ordinary course of business (such as S-Corp income) in some situations
5. Extend the increased child tax credit to 2022 and make it fully refundable
6. Extend the Earned Income Tax Credit benefits to 2022
7. Changes to IRS contribution limitations and RMD requirements
8. Prohibition of “backdoor” Roth IRA contributions and limitations of conversions to Roth IRA accounts as of 2022
9. Corporate tax changes
a. No increase to corporate tax rates
b. Create an Alternative Minimum Tax (AMT) for large corporations
c. Create an excise tax (1%) on repurchases of certain publicly traded shares
10. Implementation of the 30-day wash rule for crypto coin transactions