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Here’s How The Saver’s Credit Can Lower Your Tax Bill by $2,000

You might be eligible for 50%, 20% or 10% of the maximum contribution amount.
On the scale of great tax breaks, tax credits are the best. While deductions merely lower your taxable income, a tax credit reduces your actual tax bill dollar-for-dollar.
To be eligible for the Saver’s Credit, you must:
Seriously. Check this out.

What Is the Saver’s Credit?

Next, make your deposit.
Let’s say you do your taxes and discover you owe ,000. If you paid ,000 out of your paycheck to your retirement accounts over the course of the year and received a 0 Saver’s Credit, your tax bill would shrink to 0.
If you’re a low- or middle-income worker, you can claim the Saver’s Credit — also known as the retirement savings contributions credit — by adding money to a 401(k) or individual retirement account (IRA).
The Internal Revenue Service sets maximum adjusted gross income caps for the retirement savings contribution credit each year.
The IRS actually gives taxpayers until April 15, 2022, to make contributions to individual retirement accounts and include those investments on their 2021 taxes. Pretty cool, huh?
Not only do a lot of people forget about this credit, many low-income workers miss out on the sweet tax benefits of saving for retirement because they worry doing so will strain their tight budgets.

How Do You Qualify for the Saver’s Credit?

First, you’ll need to open a retirement account if you don’t have one already. You can open one with any brokerage firm or robo-advisor. Or, you can start contributing money to your workplace 401(k).
Your income determines the percentage of your retirement savings that will be credited to your tax bill.

  • Be 18 years or older and file a tax return.
  • Not claimed as a dependent on someone else’s tax return.
  • Not be a full-time student. (However, you’re still eligible for the Saver’s Credit if you’re enrolled in an online-only school or participating in on-the-job training).
  • Save some money in a retirement account, like an employer-sponsored 401(k).

It’s important to note that this government tax benefit is not a deduction, but a credit.
Here’s what eligible taxpayers need to do to take advantage of the Saver’s Credit.
How much the Saver’s Credit is worth depends on how much you contribute to your retirement account, your filing status and your AGI.

  • $66,000 for married filing jointly.
  • $49,500 for head of household.
  • $33,000 for a single filer or any other filing status.
Pro Tip
The maximum amount of the Saver’s Credit cannot exceed ,000 for single filers or ,000 for joint filers in 2022.

How Much Is the Saver’s Tax Credit Worth?

It’s called the Saver’s Credit, and it’s one of the most valuable tax credits available. But it’s also one of the most overlooked.

Pro Tip
Lastly, you need to file Form 8880: Credit for Qualified Retirement Savings Contributions with the IRS. If you’re using online tax software, like TurboTax, then it’s even easier to file this form with your tax return.

Finally, you must contribute new money to a retirement plan: Rollover contributions from an existing account — like a 401(k) rollover into an IRA — don’t count.
For example, a single filer earning ,000 who invests ,000 in a Roth IRA would receive a maximum credit for 50% of their contribution, or ,000.
One drawback about the Saver’s Credit is it’s nonrefundable. That means the tax credit can be used to offset income-tax liability but not as a refund. In other words if you owe no taxes but qualify for the Saver’s Credit, Uncle Sam won’t cut you a check. Bummer.

Keep reading to learn who is eligible for the Saver’s Credit and how it works.

Filing status 50% of contribution 20% of contribution 10% of contribution
Single Filers, Married Filing Separately, or Qualifying Widow(er) AGI of $19,750 or below AGI of $19,751 – $21,500 AGI of $21,501 – $33,000
Married Filing Jointly AGI of $39,500 or below AGI of $39,501 – $43,000 AGI of $43,001 – $66,000
Head of Household AGI of $29,625 or below AGI of $29,626 – $32,250 AGI of $32,251 – $49,500

When you file your 2022 taxes for the 2021 tax year, your adjusted gross income (AGI) must fall below the following thresholds to qualify for the Saver’s Credit:
If you earn too much to qualify for the Saver’s Credit, you can still receive a tax deduction by contributing to a traditional IRA.
It’s worth checking to see if you qualify for the Saver’s Credit, especially if you or your spouse were unemployed or experienced a reduction of income in 2021.

How Do I Claim the Saver’s Credit?

As you can see, people with the lowest income benefit most from the Saver’s Tax Credit.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
But a single filer earning ,000 who contributed ,000 to a Roth IRA would receive a credit of just 10% of the amount they invested, or 0.

  • Traditional or Roth IRA
  • Traditional or Roth 401(k)
  • SIMPLE IRA
  • SEP IRA
  • ABLE account (if you’re the designated beneficiary)
  • 403(b) plan
  • 457(b) plan
  • A federal Thrift Savings Plan

Ready to stop worrying about money?
First, you’ll need to meet some basic requirements.
Source: thepennyhoarder.com

Other Information About the Saver’s Tax Credit

The Saver’s Credit is worth up to ,000 for single filers, or ,000 for married couples filing jointly.
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It’s also worth noting that the Saver’s Credit can be claimed in addition to any tax deduction you receive by making qualified retirement savings contributions.
Keep in mind that the percentage of your retirement contribution you can receive as a credit decreases as your income increases.
The Saver’s Credit is a way to put money back in your pocket when you save for retirement.
Saver’s Credit Rate for 2022
So if you contribute to a traditional IRA or traditional 401(k), you could receive double tax savings: A reduction in your taxable income equal to the amount you kicked into your retirement account plus the Saver’s Credit (if you qualify). Believe it or not, the government will pay you to save. <!–

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Depending on your adjusted gross income and tax filing status, you can claim the credit for 50%, 20% or 10% of the first ,000 you contribute to a retirement account within a tax year.

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11 Surprising Things That Are Taxable

If you work for a living, you know that your wages are taxable, and you’re probably aware that some investment income is taxed, too. But, unfortunately, the IRS doesn’t stop there.

If you’ve picked up some extra cash through luck, skill or even criminal activities, there’s a good chance you owe taxes on that money as well. To avoid being caught off guard when it’s time to file your return, take a look at our list of 11 surprising things that are actually taxable. If you collected any of the income or property on the list, make sure you declare it on your next tax return!

1 of 11

Scholarships

graduation cap on moneygraduation cap on money

If you receive a scholarship to cover tuition, fees and books, you don’t have to pay taxes on the money. But if your scholarship also covers room and board, travel and other expenses, that portion of the award is taxable.

Students who receive financial aid in exchange for work, such as serving as a teaching or research assistant, must also pay tax on that money, even if they use the proceeds to pay tuition.

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Gambling Winnings

people playing crapspeople playing craps

What happens in Vegas doesn’t necessarily stay in Vegas. Gambling income includes (but isn’t limited to) winnings from lotteries, horse races, casinos and sports betting (including fantasy sports). The payer is required to issue you a Form W2-G (which will also be reported to the IRS) if you win $1,200 or more from bingo or slot machines, $1,500 or more from keno, more than $5,000 from a poker tournament, or $600 or more from other wagers if your take is more than 300 times the amount of your bet. But even if you don’t receive a W2-G, the IRS expects you to report your gambling proceeds on your tax return.

The good news: If you itemize, your gambling losses are deductible, but only to the extent of the winnings you report as income. For example, if you won $4,000 last year and had $5,000 in losing bets, your deduction for the losses is limited to $4,000. You can’t deduct the balance against other income or carry it forward.

Your state may want a piece of the action, too. Your home state will generally tax all your income (if it has an income tax) — including gambling winnings. But also watch out for a tax bill if you place a winning bet in another state. You won’t be taxed twice, though. The state where you live should give you a tax credit for the taxes you pay to the other state. Also, check to see if your state allows a deduction for gambling losses.

3 of 11

Unemployment Benefits

picture of man who was just firedpicture of man who was just fired

Millions of Americans have received unemployment compensation during the pandemic – many for the first time. While these benefits provide an important lifeline during tough times, they could also produce an unexpected tax bill.

Unemployment benefits are a form of income, and that income is generally taxable at the federal level. In some cases, state taxes are due on unemployment benefits, too. (State treatment varies, so check out our State-by-State Guide to Taxes on Unemployment Benefits to see what your state does.) According to the IRS, unemployment compensation, for the most part, includes any amounts received under federal or state unemployment compensation laws, including state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund.

You have the option to have as much as 10% of your weekly benefits withheld for federal taxes. Taxpayers will receive a Form 1099-G from the IRS, which shows the amount received and the amount of any federal income tax removed from your benefits. Taxes may be withheld from unemployment benefits at the request of the benefits claimant by using Form W-4V, while others who choose not to have their taxes withheld may need to make estimated tax payments during the year.

4 of 11

Cancelled Debt

picture of the word debt being erasedpicture of the word debt being erased

Don’t get too excited if a credit card company says you don’t have to pay off the rest of your balance. That’s because debt that is cancelled or otherwise discharged for less than the amount you owe is generally treated as taxable income. This applies to credit card bills, car loans, mortgages, or any other debt that you owe. So, for example, if your bank says you don’t have to pay $2,000 of the $6,000 you still owe on a car loan, you have $2,000 of cancellation of debt income that you must report on your next tax return.

There are some exceptions to the general rule, such as for student loans, debts discharged in bankruptcy, qualified farm indebtedness and a few other types of debt. Also, in the case of “nonrecourse” debt — i.e., where the lender can repossess any collateral property if you fail to pay, but you’re not personally liable for the unpaid debt — any cancelled debt is not considered taxable income (although you might realize gain or loss from the repossession).

If you do have a debt forgiven, the creditor may send you a Form 1099-C showing the amount of cancelled debt. The IRS will get a copy of the form, too — so don’t think Uncle Sam won’t know about it.

5 of 11

Stolen Property

picture of robber holding gun and moneypicture of robber holding gun and money

If you robbed a bank, embezzled money or staged an art heist last year, the IRS expects you to pay taxes on the proceeds. “Income from illegal activities, such as money from dealing illegal drugs, must be included in your income,” the IRS says. Bribes are also taxable.

In reality, few criminals report their ill-gotten gains on their tax returns. But if you’re caught, the feds can add tax evasion to the list of charges against you. That’s what happened to notorious gangster Al Capone, who served 11 years for tax evasion. Capone never filed a tax return, the IRS says.

6 of 11

Buried Treasure

picture of treasure chestpicture of treasure chest

In September 2020, a man found a 9-carat diamond in the Crater of Diamonds State Park in Pike County, Arkansas. It was the second-largest diamond ever found in the park and could be worth more than $1 million.

But be aware that if you find a diamond in the rough, unearth a cache of gold coins in your backyard or discover sunken treasure while deep-sea diving, the IRS wants a piece of your booty. Found property is taxable at its fair market value in the first year it’s your undisputed possession, the IRS says.

The precedent for the IRS’s “treasure trove” rule dates back to 1964, when a couple discovered $4,467 in a used piano they had purchased for $15. The IRS said the couple owed income taxes on the money, and a U.S. District Court agreed.

7 of 11

Gifts from Your Employer

picture of gold club with gift bow on itpicture of gold club with gift bow on it

Ordinarily, gifts aren’t taxable, even if they’re worth a lot of money. But if your employer gives you a new set of golf clubs to recognize a job well done (or to persuade you to reject a job offer from a competitor), you’ll probably owe taxes on the value of your new irons.

More than 50 years ago, the Supreme Court ruled that a gift from an employer can be excluded from the employee’s income if it was made out of “detached and disinterested generosity.” Gifts that reward an employee for his or her services don’t meet that standard, the court said. Gifts that help promote the company don’t meet that standard, either.

8 of 11

Bitcoin

picture of bitcoin logopicture of bitcoin logo

While you can use bitcoin to purchase a variety of goods and services, the IRS considers bitcoin — along with other cryptocurrencies — to be an asset. If the bitcoin you used to make a purchase is worth more than you paid for it, you’re expected to pay taxes on your profits at capital gains rates — just like stocks and bonds.

Also be warned that, as the use of cryptocurrency increases, the IRS is starting to pay more attention to it. For instance, since 2019, the tax agency has been sending letters to people who may not have reported transactions in virtual currencies. Plus, the 2021 Form 1040 includes a line asking taxpayers if they received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency during the tax year. 

Some cryptocurrency platforms are sending investors statements that provide a record of their transactions. But even if you didn’t get a statement, you’re responsible for paying taxes on your crypto gains.

If your employer pays you in bitcoin or some other virtual currency, it must be reported on your W-2 form, and you must include the fair market value of the currency in your income. It’s also subject to federal income tax withholding and payroll taxes.

9 of 11

Bartering

picture of people trading an apple for a cupcakepicture of people trading an apple for a cupcake

When you exchange property or services in lieu of cash, the fair market value of the goods and services are fully taxable and must be included as income on Form 1040 for both parties. But an informal exchange of similar services on a noncommercial basis, such as carpooling, is not taxable.

If you exchanged property or services through a barter exchange, you should expect to receive a Form 1099-B (or a similar statement) in the mail. It will show the value of cash, property, services, credits or scrip you received from bartering.

10 of 11

Payment for Donated Eggs

picture of a petry dishpicture of a petry dish

Every year, thousands of young, healthy women donate their eggs to infertile couples. Payments for this service generally range from $6,500 to $30,000, according to Egg Donation, Inc., a company that matches donors with couples. Those payments are taxable income, according to the U.S. Tax Court. Fertility clinics typically send donors and the IRS a Form 1099 documenting the payment.

11 of 11

The Nobel Prize

picture of Nobel Prizepicture of Nobel Prize

If you were selected for this prestigious honor — worth about $1.1 million in 2021 — you must pay taxes on it.

Other awards that recognize your accomplishments, such as the Pulitzer Prize for journalists, are also taxable. The only way to avoid a tax hit is to direct the money to a tax-exempt charity before receiving it. That’s what President Obama did when he was awarded the Nobel Peace Prize in 2009. If you accept the money and then give it to charity, you probably will have to pay taxes on some of it because the IRS ordinarily limits charitable deductions to 60% of your adjusted gross income (for the 2021 tax year, under a provision in the CARES Act, you can deduct donations of up to 100% of your AGI to charity).

Source: kiplinger.com

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Will You Have to Pay Back Your Child Tax Credit Payments?

The IRS sent the final round of 2021 child tax credit payments on December 15. Overall, eligible families received up to $1,800 in total monthly payments for each child five years old or younger and up to $1,500 for each kid 6 to 17 years old. (Parents with higher incomes didn’t receive that much or were denied the credit altogether.) If you have a large family, that adds up to a pretty hefty chunk of change. But what if the IRS sent you too much money – do you have to pay it back? Well…maybe.

The law authorizing the monthly child credit payments specifically says that any excess amounts must be paid back when you file your 2021 tax return if your income is above a certain amount. There are exceptions to this rule for middle- and lower-income families, but they’re limited. Plus, the way the monthly payments were calculated, overpayments could be fairly common. So, this could be a big issue for a lot of families.

Changes to the Child Tax Credit for 2021

Before getting into how you might end up with an overpayment and the details of the payback rules, it’s probably a good idea to go over some of the changes to the child tax credit that apply for the 2021 tax year (and, so far, only for 2021). For the 2020 tax year, the maximum child tax credit was $2,000 per child 16 years old or younger. It was also phased-out if your income exceeded $400,000 for married couples filing a joint return or $200,000 for single and head-of-household filers. For some lower-income taxpayers, the credit was partially “refundable” (up to $1,400 per qualifying child) if they had earned income of at least $2,500 (i.e., you got a refund check for the refundable amount if the credit was more than the tax you owed).

The American Rescue Plan, which was enacted in March 2021, made some major changes to the child tax credit for the 2021 tax year. For one thing, the credit amount was raised from $2,000 to $3,000 for children 6 to 17 years old and to $3,600 for kids 5 years old and younger. The $2,500 earned income requirement was also dropped, and the credit was made fully refundable (which means refund checks triggered by the 2021 credit can be greater than $1,400).

There are also two phase-out schemes in play for families with higher incomes in 2021. The first one can’t reduce the credit amount below $2,000 per child. It kicks in if your modified adjusted gross income (AGI) is above $75,000 (single filers), $112,500 (head-of-household filers), or $150,000 (joint filers). The second phase-out is the same $200,000/$400,000 one that applied before 2021.

Finally, the American Rescue Plan required the IRS to pay half of your total credit amount in advance through monthly payments issued from July to December 2021 (you could have opted-out if you wanted to). In most cases, the IRS based the amount of the payments on information it pulled from your 2020 tax return. You’ll claim the remaining half of the credit on your 2021 tax return, which is due April 18, 2022. In practice, this will be done by subtracting every dollar you received from July to December from the total credit you’re entitled to claim and then reporting the leftover amount, if any, as a child tax credit on your 2021 return. (Use our 2021 Child Tax Credit Calculator to see how much your monthly payments should have been and what should be leftover to claim as a credit on your 2021 tax return.)

For complete coverage of the changes for 2021, see Child Tax Credit 2021: How Much Do I Get? When Do Monthly Payments Arrive? And Other FAQs.

How Child Tax Credit Overpayments Can Occur

You may be wondering why the IRS would send you too much money in the first place. If the goal was simply to give you a 50% advance of your total child tax credit over a six-month period, it doesn’t seem like that would be too difficult. It’s basic math – right?

Well, yes, the math itself is easy…but things change, which may have made it difficult for the IRS to find the right numbers to plug into its computers. For instance, what if your income increased in 2021 to a point where your child tax credit is now partially or completely phased out. The IRS likely looked at your 2020 tax return to calculate the amount of your 2021 monthly payments. If your 2020 income was below the credit’s phase-out thresholds, the IRS probably sent you the maximum amount each month. However, because of your higher 2021 income, your 2021 child tax credit is going to be lower than expected…which could create an overpayment.

Since the child tax credit phase-out thresholds are tied to your filing status, a similar situation can arise from a change to your family situation in 2021 (e.g., a divorce). For example, imagine that the IRS based your monthly payments on your 2020 joint return and your 2021 income is lower than the credit phase-out threshold for joint filers. You then use a different filing status on your 2021 return with a lower credit phase-out threshold (e.g., single or head-of-household) that results in a reduced child tax credit amount. That can also generate an overpayment.

If you claim the child tax credit for fewer children in 2021 than you did in 2020, that can result in an overpayment, too. This can happen, for instance, if you’re divorced and you claimed your child as a dependent on your 2020 tax return, but your ex-spouse claims the child as a dependent for 2021 taxes (a common arrangement). In that case, the IRS probably sent you monthly payments for the child. However, since you won’t qualify for the child tax credit on your 2021 return (your ex will), all the money you received from July to December will be an overpayment.

And here’s one more example…your main home must be in the U.S. for more than half of 2021 to qualify for monthly child tax credit payments. If you satisfied that requirement in 2020, but not in 2021, the IRS most likely sent you monthly payments that you’re not supposed to get. That can result in an overpayment as well.

Repayment Requirements for the 2021 Child Tax Credit

Now let’s talk about what happens if you end up with a child tax credit overpayment. Depending on your income, you might have to pay some or all of it back as an addition to the tax you owe when you file your 2021 return.

Lower-income people get a good deal. If your modified AGI for 2021 doesn’t exceed $40,000 (single filers), $50,000 (head-of-household filers), or $60,000 (joint filers), and your principal residence was in the U.S. for more than half of 2021, you won’t have to repay any overpayment amount. That’s a win for you!

On the other hand, parents with higher incomes don’t get any breaks at all. If your modified AGI for the 2021 tax year is at least $80,000 (single filers), $100,000 (head-of-household filers), or $120,000 (joint filers), you have to pay back your entire overpayment. Ouch!

It’s a little more complicated for people in the middle. All or part of your overpayment might be forgiven if your modified AGI for 2021 is between $40,000 and $80,000 (single filers), $50,000 and $100,000 (head-of-household filers), or $60,000 and $120,000 (joint filers). To determine how much of your overpayment is wiped out (if any), you first need to calculate what the IRS calls your “repayment protection amount.” This is equal to $2,000 multiplied by:

  • The number of children the IRS used to calculate your monthly child tax credit payments, minus
  • The number of children used to calculate the total credit amount on your 2021 tax return.

If there’s no difference between the number of children used to calculate the two amounts, then there’s no overpayment reduction, and the full amount must be repaid. If you have a positive repayment protection amount, it’s then gradually phased-out as your modified AGI increases within the income range above. The phase-out rate is based on how much your modified AGI exceeds the lower limit of the applicable income range. Once your final repayment protection amount is calculated, it’s subtracted from your overpayment to determine how much you need to repay (but your overpayment can’t be reduced below zero).

Here’s an example of how this works: Joe, who is single, claimed a child tax credit for two children on his 2020 tax return (the children are 2 and 4 years old at the end of 2021). As a result, the IRS sent him $3,600 in monthly payments in 2021. However, Joe can’t claim the child tax credit on his 2021 return because his ex-wife is claiming the children as dependents on her return. Since his 2021 child tax credit is $0, the entire $3,600 he received from the IRS is an overpayment. Joe’s initial repayment protection amount is $4,000 (i.e., $2,000 for each child). If Joe files a 2021 return with a modified AGI of $60,000, his modified AGI exceeds the lower limit of the applicable income range – $40,000 – by 50% ($60,000 – $40,000 / $80,000 – $40,000 = 0.5). As a result, Joe’s $4,000 repayment protection amount is reduced by 50% to $2,000. Therefore, Joe only has to repay $1,600 of his $3,600 overpayment ($3,600 – $2,000 = $1,600).

[Note: You may also have to pay a portion of your overpayment if your modified AGI is less than or equal to $40,000 (single filers), $50,000 (head-of-household filers), or $60,000 (joint filers) and you lived outside the U.S. for at least half of 2021.]

Changes in the Build Back Better Act

The Build Back Better Act, which is currently working its way through Congress, would extend the child tax credit enhancements for one more year (including the monthly payments). However, the legislation would also make some changes to the 2021 credit.

Two of the proposed changes would affect the pay back rules. First, to make it easier for some families to keep some or all of an overpayment, the bill would increase the “repayment protection amount” multiplier from $2,000 to $3,000 for children six to 17 years of age, and to $3,600 for children five years old or younger.

Second, regardless of your income, you would have to pay back any overpayment if the IRS determines that a child was taken into account for purposes of calculating your monthly child tax credit payments because of fraud or the intentional disregard of rules and regulations. Planning or making arrangements with someone else have a child taken into account for monthly payments more than once would be treated as intentionally disregarding rules and regulations. Merely expecting another person to take a child into account more than once would also be a violation that forces repayment. (See Child Tax Credit 2022: How Next Year’s Credit Could Be Different for more information on potential child tax credit changes.)

It’s too early to tell if the Build Back Better Act will ultimately be signed into law. After passing in the House, it’s now stuck in the Senate. However, even if the bill does make it through Congress, the child tax credit provisions currently in the legislation could be changed. As a result, there could be additional modifications to the repayment rules…or the current amendments could be removed. So, stay tuned for further developments if you have a child tax credit overpayment that may have to be repaid.

Source: kiplinger.com

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What Happens When $250+ Monthly Child Tax Credits End on Dec. 15?

Source: thepennyhoarder.com
The payments scheduled for Wednesday, Dec. 15, will be the final round for the monthly child credits.

Why Are the Child Tax Credits Ending?

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.
The only way to get the remaining half of the credit is to file your 2021 tax return. Typically, you can file your taxes starting in mid- to late January. The deadline to file taxes for 2021 is April 15, 2022, unless you file for a six-month extension. If you or your partner gave birth to or adopted a child in 2021, you can receive the full credit of up to ,600 when you file.
Ready to stop worrying about money?

Could Congress Extend the Expanded Credits?

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Unless Congress takes action before year’s end, the payments will end on Dec. 15. If the extension expires, child tax credits will revert to the normal amount. A married couple with a combined income of 0,000 or less can receive up to ,000 per child. However, the payments won’t be available in advance monthly installments. That means you’d have to wait until tax time to receive the credit.

How Do I Get the Other Half of the Credit?

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In March 2021, President Joe Biden signed the .9 trillion American Rescue Plan into law. Along with ,400 stimulus checks for most Americans, the bill provided a temporary child tax credit boost. “Temporary” is the key word here.
Since July, parents who qualify have received up to 0 a month for each child between 6 and 17, and up to 0 a month for each child younger than 6. The remaining half of the credit — ,500 to ,800, depending on the child’s age — will be disbursed next year when parents file their taxes for 2021.
It’s possible, but don’t count on it. The Build Back Better Act that Biden wants to pass before Christmas includes a one-year extension of the expanded credit and additional measures to address soaring child care costs. But as of Dec. 13, the bill remains at an impasse in the U.S. Senate. <!–

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The quickest way to receive your additional child tax credit money is to file a return online. There are plenty of free tax filing software programs that simplify the process. But it’s vital that you file online instead of by mail. Submitting a paper return could add weeks, if not months, to your wait time.

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Give Cash Now, Cut Your Estate Tax Later

Are you having trouble finding gifts those “hard to shop for” relatives? Don’t waste any more time trying to find something they might want – give ’em cash! Everyone likes money, right? Plus, giving money to family or friends can also be a smart tax planning move. For wealthier Americans, giving away cash now can help you reduce or even avoid estate taxes when you die. Plus, you can make family and friends very, very happy!

The general rule is that any gift is subject to the federal gift tax. However, there’s an important exception to this rule — you can give up to $15,000 per person during the year without having to file a gift tax return (the exemption amount goes up to $16,000 in 2022). If you’re married, your spouse can also give $15,000 to the same people, jacking the annual tax-free gift up to $30,000 per person. (The recipient pays no tax on the money, either.) So, for example, if you’re married and have three married children and six grandchildren, you and your spouse can give up to $30,000 this year to each of your kids, their spouses and all the grandchildren without even having to file a gift tax return. That’s $360,000 in tax-free gifts! And you can do that year-after-year without paying any gift tax unless the total of all your non-exempt gifts over the years exceeds the lifetime limit, which is $11.7 million for 2021 ($12.06 million for 2022). But since the $15,000 (or $30,000) limit is an annual limit, you have to make your gifts before the end of the year (gift checks must also be deposited by December 31).

And here’s the added bonus: Whatever you give away this year, up to the $15,000-per-recipient limit, won’t be counted for estate tax purposes when you die. So, for example, if the current value of your estate is above the federal estate tax exclusion amount ($11.7 million for 2021 and $12.06 million for 2022), giving away money now could drop the value below the exclusion amount, which would mean no federal estate tax when you pass away. Also keep in mind that the estate tax exclusion amount will fall to $5 million (plus an inflation adjustment) in 2026, unless Congress permanently adopts the current amount. So, even if your estate is not worth more than the exclusion amount now, it might be after 2025. (IRS regulations also guarantee that tax-free gifts you make now won’t trigger estate taxes if/when the exclusion amount is lowered.) There could be state estate taxes to worry about, too — 12 states and the District of Columbia have their own estate tax, and all of them currently have exclusion amounts far below the current federal standard (as low as $1 million in Massachusetts and Oregon). In addition, even if giving away money now doesn’t allow you to completely avoid estate taxes, you’ll still reduce the estate tax owed by reducing the value of your estate.

What if you’re feeling extra generous and want to give more than $15,000 (or $30,000 per couple) to someone this year? You’ll have to file a gift tax return (Form 709), and the amount over $15,000 is potentially a taxable gift. However, you can still avoid gift and estate taxes if the total amount of taxable gifts so far over your lifetime is less than $11.7 million. So, if you’re thinking of dropping a very large amount of cash in someone’s lap, it doesn’t necessarily mean you’ll have to pay taxes on the gift.

Source: kiplinger.com

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Biden Tax Plan Passed by House: How the Build Back Better Act Could Affect Your Tax Bill

President Biden’s “Build Back Better” social spending and tax bill is slowly working its way through Congress. It was just passed by the House of Representatives and is now on its way to the Senate. While there’s still plenty of political wrangling to come, and additional changes are expected in the Senate, we now have a better sense of where the Democrats are headed with this budget reconciliation bill. The president’s plan calls for sharp spending increases for a wide variety of social programs that would impact childcare, health care, higher education, climate change, and more. The package also contains a number of tax law changes that would boost taxes for some people and cut them for others.

How might these changes affect your future income tax bills if the Build Back Better Act ultimately becomes law? First, the proposed legislation calls for higher taxes and fewer tax breaks for the wealthy. That’s no surprise, because Biden and Congressional Democrats have said for months that they want to make the rich pay their “fair share” of taxes and use the additional revenue to strengthen the social safety net. The bill would also extend enhancements to certain tax credits for lower- and middle-income families. These enhancements were designed to help ordinary Americans pay for some of the day-to-day expenses they incur. There are also new or improved tax breaks for higher education costs, clean energy initiatives, and expenses paid by certain workers.

At this point, it’s impossible to say which (if any) of the proposed tax law changes will survive and be enacted into law. Additional tax provisions could be added later, too. Nothing is set in stone yet. However, smart taxpayers will get up-to-speed on the Build Back Better bill’s tax proposals now, so they’re prepared if/when they make it through the legislative process. To get you started, we’ve identified some of the most common ways the Build Back Better plan could either raise or lower your taxes. After all, what you know now could save you big bucks down the road.

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Imposing a Surtax on Wealthy Americans

picture of young rich couple outside their homepicture of young rich couple outside their home

Negotiations over how to pay for the planned social spending provisions were contentious at times. There always seemed to be general agreement among the president and most Congressional Democrats that higher taxes on the wealthiest Americans should be part of the plan. But nailing down exactly how to tax them proved to be difficult. The Democrats bounced back and forth between a laundry list of proposals, including raising the top income tax rate, taxing capital gains at ordinary rates, eliminating stepped-up basis on inherited property, and a “billionaires tax” on the value of unsold assets.

The Build Back Better plan passed by the House settles on a “surtax” on millionaires and billionaires starting in 2022. The extra tax would equal 5% of modified adjusted gross income from $10 million to $25 million ($5 million to $12.5 million for married taxpayers filing a separate return). It would then jump to 8% for modified AGI above $25 million ($12.5 million for married taxpayers filing separately). Modified AGI would mean regular AGI reduced by any deduction allowed for investment interest.

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Expanding the Surtax on Net Investment Income

picture of three stock traders looking at computer screenspicture of three stock traders looking at computer screens

In addition to the capital gains tax, wealthier Americans may also be hit with an additional 3.8% surtax on net investment income (NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities, and royalties.) This surtax only applies if you’re a single or head-of-household filer with a modified AGI over $200,000, a joint filer with a modified AGI over $250,000, or a married person filing a separate return with a modified AGI over $125,000.

Starting in 2022, the Build Back Better Act would expand the surtax to cover net investment income derived in the ordinary course of a trade or business for single or head-of-household filer with a modified AGI over $400,000, a joint filer with a modified AGI over $500,000, or a married person filing a separate return with a modified AGI over $250,000.

The legislation also clarifies that the surtax doesn’t apply to wages on which Social Security and Medicare payroll taxes (i.e., FICA taxes) are already imposed.

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Permanently Disallowing Excess Business Loss Deduction

picture of worried businessman looking at negative charts and graphspicture of worried businessman looking at negative charts and graphs

Another provision in the Build Back Better Act to limit business loss deductions would heap more taxes (mostly) on the rich. Under current law, non-corporate business owners can’t deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. Any excess losses can be treated as a net operating loss in later tax years, though.

This business loss limitation rule is currently set to expire in 2027. However, under the Build Back Better Act, the rule would be made permanent retroactively beginning with the 2021 tax year. In addition, the legislation would only allow excess losses to be treated as a deduction for the next tax year and repeal the limit on excess farm losses by farmers who received certain subsidies.

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Denying Tax Break for Sale of Small Business Stock by Wealthy Taxpayers

picture of upset rich manpicture of upset rich man

President Biden’s proposal would also choke off a tax break for higher-income Americans who invest in small businesses. Currently, there’s no tax on any gain from the sale or exchange of certain small business stock if you acquired the stock after September 27, 2010, and held it for more than five years. (For qualifying stock acquired from February 18, 2009, to September 27, 2010, 75% of the gain is tax-free.)

The Build Back Better Act would deny wealthier investors this tax break. Under the bill, the exclusion from gross income generally wouldn’t be allowed for gains from the sale or exchange of qualified small business stock after September 13, 2021, if your modified AGI is $400,000 or more. There would be one exception, though. The new rule wouldn’t apply to any sale or exchange made pursuant to a written binding contract that was in effect on September 13, 2021, and not modified in any material respect after that date.

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Curbing Mega-IRAs, Backdoor Roths and Other Retirement Savings for the Rich

picture of three eggs with IRA, Roth and 401k written on thempicture of three eggs with IRA, Roth and 401k written on them

If enacted, the Build Back Better package would curb a wealth person’s ability to stuff money in tax-advantage retirement savings accounts in a few ways. First, beginning in 2029, a new limit on IRA contributions would kick in if the total value of your IRA and defined contribution plans (e.g., 401(k), 403(b), and 457 plans) hits $10 million and your modified AGI exceeds:

  • $400,000 for single filers;
  • $425,000 for head-of-household filers; or
  • $450,000 for joint filers.

A new “required minimum distribution” (RMD) rule would be put in place for mega-IRAs and 401(k) plans starting in 2029, too. Under the proposal, a retirement plan distribution would be required if the combined total of your IRAs and defined contribution plans reached $10 million and your income exceeded the applicable threshold listed above ($400,000, $425,000, or $450,000). Generally, the distribution would equal 50% of the retirement savings over $10 million, but larger distributions could be required if savings surpass $20 million.

The Build Back Better plan would also restrict Roth conversions for wealthier Americans. First, beginning in 2022, it would put a stop to “backdoor” Roth IRA conversions. This popular tactic allows wealthier people avoid the Roth IRA contribution limits by making nondeductible contributions to a traditional IRA and then transferring those contributions to a Roth IRA later. However, under the proposed legislation, you won’t be able to convert after-tax contributions in an IRA or qualified retirement plan to a Roth account, regardless of your income. Then, starting in 2032, the proposed plan would eliminate all Roth conversions if your income exceeded the applicable threshold provided above ($400,000, $425,000, or $450,000).

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Modifying the SALT Deduction Cap

picture of a salt shaker on its side with salt spilling out of itpicture of a salt shaker on its side with salt spilling out of it

Here’s a proposed change that goes against the grain – rolling back the state and local tax (SALT) deduction limit. It’s odd because the change would, for the most part, provide a tax cut for wealthy people.

The 2017 tax reform law placed a temporary $10,000 cap on the itemized deduction for state and local taxes until 2026. By limiting the deduction, the cap tends to increase taxes paid by wealthier people, who typically pay more state and local taxes and tend to itemize instead of claiming the standard deduction. Under the Build Back Better Act, the cap would be extended through 2031. It would also be increased from $10,000 to $80,000 for 2021 to 2030 (it would go back down to $10,000 for 2031).

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Extending the Earned Income Tax Credit Enhancements

picture of dishwasher working in a restaurantpicture of dishwasher working in a restaurant

The Build Back Better plan doesn’t just focus on rich people. Jumping to the other end of the income spectrum, the enhancements made to the 2021 earned income tax credit (EITC) that benefit childless workers would be extended for one more year under the plan. The EITC is only available to low- to middle-income workers and families, and the enhancements that would stretch into 2022 were part of the American Rescue Plan, which was enacted in March 2021.

In a nutshell, the EITC improvements for workers with no qualifying children that would be extended to 2022 include:

  • Lowering the minimum age from 25 to 19 (except for certain full-time students);
  • Eliminating the maximum age limit (65), so older people without qualifying children can also claim the credit;
  • Increasing the maximum credit from $543 to $1,502 for the 2021 tax year (the maximum would be adjusted for inflation for the 2022 tax year); and
  • Expanding eligibility rules for former foster youth and homeless youth.

You would also be allowed to base your 2022 EITC on your 2021 income (instead of your 2022 income) if that would increase your credit amount. That’s similar to the rules applicable to the 2020 and 2021 EITC that permitted use of a person’s 2019 income to calculate the credit. This would help people who are laid off, furloughed, or otherwise experienced a loss of income in 2022.

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Extending Child Tax Credit Enhancements and Monthly Payments

picture of truck driver with his familypicture of truck driver with his family

President Biden also wants to extend enhancements to another popular tax credit for American families – the child tax credit. That would mean monthly advance payments in 2022, too. The credit would also be made fully refundable on a permanent basis. It’s fully refundable for 2021, but normally only up to $1,400-per-child is refundable, and you must have at least $2,500 of earned income. (With refundable credits, the IRS will send you a refund check if the credit is worth more than your income tax liability.) The president wants to repeal the requirement that each qualifying child have a Social Security number, too.

The American Rescue Plan pushed the amount of the child tax credit for the 2021 tax year from $2,000 to $3,000-per-child for most kids – and to $3,600 for children 5 years old and younger. Those higher credit amounts would continue through 2022 under the president’s plan. However, as with the 2021 credit, the extra $1,000 or $1,600 for 2022 would be phased-out for families with higher incomes. For people filing their tax return as a single person, the additional amount would be reduced if their AGI is above $75,000. The phase-out would start at $112,500 of AGI for head-of-household filers and $150,000 of AGI for married couples filing a joint return. The 2022 credit amount would be reduced further using the pre-2021 phase-out rules if AGI exceeds $400,000 on joint tax returns or $200,000 on single and head-of-household returns. Your 2021 AGI (rather than your 2022 income) would be used for phase-out rule purposes if you so elected.

Under the Biden plan, monthly child tax credit payments during 2022 would max out at $250-per-month for each child between six and 17 years of age, and $300-per-month for each child five years old or younger. However, unlike payments in 2021, monthly payments generally wouldn’t be sent to families in 2022 if their AGI exceeds $75,000 (single filers), $112,500 (head-of-household filers), or $150,000 (joint filers).

With regard to the “safe harbor” rules that let lower-income families keep any excess advance payments, the president’s plan calls for an exception if a child is taken into account for purposes of the advance payments through fraud or the intentional disregard of rules and regulations. The safe harbor amount would also increase from $2,000 to $3,000 ($3,600 for a child five years old or younger).

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Extending Premium Tax Credit Enhancements

picture of doctor taking a cash paymentpicture of doctor taking a cash payment

The American Rescue Plan made temporary improvements to the premiums tax credit, too. This credit helps people pay premiums for health insurance purchased through an Obamacare exchange (e.g., HealthCare.gov). The current Build Back Better Act aims to extend the current enhancements from one to four years.

Provisions that are up for extension under the plan would:

  • Lower the percentage of annual income that eligible Americans must contribute toward their premium (extend through 2025);
  • Permit people with an income above 400% of the federal poverty line to claim the credit (extend through 2025); and
  • Disregard household income exceeding 150% of the federal poverty line for people receiving unemployment benefits (extend through 2022; income exceeding 133% of the federal poverty line is disregarded for the 2021 tax year).

There are new enhancements for the 2022 to 2025 tax years in the president’s plan, too. For instance, there are various provisions in the plan that would temporarily modifies certain eligibility rules and requirements to help lower-income people qualify for the credit. The president also wants to lower the threshold used to determine whether a taxpayer has access to affordable insurance through an employer-sponsored plan or a qualified small employer health reimbursement arrangement. Under Biden’s plan, an employee’s required contribution with respect to such a plan or arrangement couldn’t exceeds 8.5% of his or her household income from 2022 to 2025 (instead of 9.5%). Other provisions would exclude certain lump-sum Social Security benefit payments and the modified AGI of certain dependents 23 years old or younger from the calculation of household income.

In a related move, the Build Back Better plan would also make the health coverage tax credit permanent (the credit currently doesn’t apply after 2021). This credit is only available if you’re (1) eligible for Trade Adjustment Assistance allowances because of a qualifying job loss, or (2) between 55 and 64 years of age with a defined-benefit pension plans that was taken over by the Pension Benefit Guaranty Corporation. The Biden plan would also increase the amount of the credit from 72.5% to 80% of the amount paid for qualified health insurance coverage.

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Adding Tax Breaks for Education

picture of small, paper graduation cap sitting on moneypicture of small, paper graduation cap sitting on money

College students would get a few additional tax breaks under President Biden’s plan. First, it would exclude federal Pell grants from gross income.

In addition, tuition and related expenses wouldn’t be reduced by the amount of any Pell grant for purposes of calculating the American Opportunity Credit or the Lifetime Learning Credit.

And, finally, students convicted of a state or felony drug offense would be allowed to claim the American Opportunity Credit. These changes would apply beginning in 2022.

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Adding or Improving Tax Breaks for Clean Energy and Energy Efficiency

picture of solar panels on the roof of a housepicture of solar panels on the roof of a house

One of the main goals of the president’s Build Back Better plan is to address climate change. This clearly shows up in the many tax provisions in the plan designed to encourage clean energy and energy efficiency. For instance, the credit for nonbusiness energy property added to your home would be extended through 2031 (it’s currently set to expire at the end of this year). In addition, the credit amount would jump from 10% to 30% of the cost of installing qualified energy efficiency improvements, the $500 lifetime cap would be replaced by a $1,200 annual credit limit, a $600-per-item limit would be placed on credits for qualified energy property, the credit would apply to the costs of home energy audits, and more.

The credit for residential energy efficiency property would also be extended under the current Build Back Better Act – this time through 2033 (it’s current set to expire after 2023).This credit applies to the cost of solar, wind, geothermal or fuel cell technology used to generate power in your home. The president’s plan would extend the credit to cover battery storage technology. The full 30% credit would also apply through the end of 2031, then the credit would drop to 26% in 2032 and 22% in 2033. It would also be made refundable beginning in 2024.

Other green energy or conservation tax proposals that would help individuals (as opposed to businesses) include:

  • Excluding water conservation, storm water management, and wastewater management subsidies provided by public utilities, state or local governments, or storm water management providers from gross income;
  • Creating a 30% tax credit for qualified wildfire mitigation expenditures;
  • Establishing a tax credit of up to $12,500 (but not more than the cost of the car) for the purchase of a new plug-in electric motor vehicle;
  • Creating a tax credit of up to $4,000 (but not more than the cost of the car) for the purchase of a used plug-in electric motor vehicle;
  • Extending the tax credit for the purchase of a qualified fuel cell motor vehicle through 2031, but only with respect to vehicles not subject to depreciation;
  • Reinstating the exclusion from gross income for bicycle commuting benefits (they are currently suspended until 2026), and increasing the maximum benefit from $20 to $81 per month (based on 2021 inflation adjusted amounts); and
  • Establishing a tax credit of up to $900 for the purchase of an electric bicycle.

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Adding Deductions for Union Dues and Work Uniforms

picture of nurses in uniformpicture of nurses in uniform

Workers would get two temporary above-the-line deductions if the Build Back Better Act is signed into law. The first would be for up to $250 of union dues. This deduction would be available from 2022 to 2025.

The second deduction would be for up to $250 uniforms or other work clothes that are required as a condition of employment and not suitable for everyday wear. This write-off would be available from 2022 to 2024.

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Subjecting Cryptocurrency and Other Assets to Wash Sale Rules

picture of a bitcoin smashing through a dollar billpicture of a bitcoin smashing through a dollar bill

People investing in commodities, currencies, and digital assets such as cryptocurrency would be subject to the “wash sale” rule if the Build Back Better Act becomes law. Currently, trading in those types of assets isn’t covered by the rule.

Basically, the rule states that you can’t deduct a loss from the sale or other disposition of stock or securities if you buy the same asset within 30 days before or after you sell it. Fortunately, though, if a deduction is denied because of the rule, the loss is added to the cost basis of the newly purchased stock. So, when you sell the new stock later, the tax on any gains will be lower.

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Extending Time for Same-Sex Couples to File Amended Tax Returns

picture of same-sex couple working on taxespicture of same-sex couple working on taxes

In 2013, the IRS began allowing same-sex couples who were legally married under state law to file joint tax returns. The tax agency also allowed same sex-couples to amend their tax returns to change their filing status to married filing jointly if they were married before 2013. However, they were generally only allowed to file amended returns going back to 2010.

Under the Build Back Better Act, same-sex couples who were lawfully married prior to 2010 would be able to change their filing status on pre-2010 returns if they were married during the tax year at issue. This would enable many couples, who were legally married as far back as 2004, to claim or increase credits, deductions, and other tax breaks that were not fully available to them on previous tax returns because they couldn’t file a joint return.

Source: kiplinger.com

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5 Year-End Moves to Help Retirees Trim Their Tax Bill

Just because you already filed your tax return doesn’t mean you’re done with taxes for the year. Smart taxpayers think about how to reduce their tax bill all year long. The end of the year is a particularly good time to cut next year’s tax bill to the bone. Here are a few moves retirees and people nearing retirement should consider before 2022 arrives.

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Max Out Retirement Savings Accounts

A person puts a coin in a piggy bankA person puts a coin in a piggy bank

If you haven’t retired, contribute as much as possible to your retirement accounts this year. If you’re still working, you can contribute up to $19,500 to a 401(k) for 2021 ($26,000 if you’re age 50 and older). But you need to do so before the end of the year.

This year’s contribution limit for IRAs is $6,000 ($7,000 if you’re at least 50 years old). When income exceeds $125,000 for singles or $198,000 for married couples filing jointly, the 2021 contribution amount for a Roth IRA is gradually reduced — eventually to zero when income hits $140,000 for singles or $208,000 for joint filers. You have until April 18, 2022, to contribute to an IRA for the 2021 tax year, but why wait? Max out your IRA account by New Year’s Eve if you can.

Contributions to a traditional IRA are generally deductible, too. The deduction is phased out if you participate in an employer’s retirement plan and your 2021 income exceeds $66,000 (singles) or $105,000 ( joint filers) and is eliminated once your income reaches $76,000 or $125,000, respectively. You generally need earned income to put money in an IRA. If you’re retired, a spouse who is still working can contribute to a “spousal IRA” for you.

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Pay 2021 Taxes with RMDs

A binder with required minimum distributions written on the side sitting on top of some charts. A binder with required minimum distributions written on the side sitting on top of some charts.

If you don’t have taxes withheld from your traditional IRA withdrawals or Social Security benefits, or if you have taxable income from interest, dividends or some other non-wage source, wait until December to take your required minimum distribution if possible. Then have enough withheld from the RMD to cover taxes on other income. That saves you the hassle of making estimated tax payments during the year.

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Donate with QCDs

A pair of hands carefully hold a soft red crocheted heart.A pair of hands carefully hold a soft red crocheted heart.

If you’re in a giving mood, consider using a qualified charitable distribution to donate IRA funds to charity. Seniors at least 70½ years old can transfer up to $100,000 directly from a traditional IRA to charity with a QCD without raising their adjusted gross income. A lower AGI can keep the tax on Social Security benefits in check and help you qualify for other income-based deductions. A QCD can count as your RMD, too. That makes it a powerful tool for generous retirees.

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Sell Some Stock

Concept art showing changes in the stock market. Concept art showing changes in the stock market.

There’s no tax on 2021 capital gains for a married couple filing jointly with a taxable income below $80,800 ($40,400 for singles). If your income meets that threshold and you own stock that has increased in value, consider selling it to take advantage of the 0% capital gains tax rate for shares held at least one year. For example, if your joint income is $75,000, you can realize up to $5,800 in capital gains from the sale of stock and not owe any tax on that profit.

You might also sell stock that has decreased in value and use your losses to offset taxable capital gains to reduce your tax bill. Note that short-term gains are first offset with short-term losses, and long-term gains with long-term losses, but then any remaining losses can be used to offset the opposite kind of gain. After that, up to $3,000 of any losses left can be used to offset ordinary income. Any remaining losses can be rolled over to the next year.

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Give Money to Family and Friends

You can give up to $15,000 to any person during the year without having to file a gift tax return. If you’re married, your spouse can also give $15,000 to the same person. Whatever you give away this year (up to the $15,000 per person limit) won’t be counted for estate tax purposes when you die. But you must make your gifts before the end of the year, and the gift checks must be deposited by Dec. 31.

Source: kiplinger.com

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How the Latest Biden Tax Plan Could Affect You

While there’s still plenty of political wrangling to come, the “Build Back Better” plan that President Biden recently released (as modified in the House) gives us a sense of where the Democrats are headed with their planned budget reconciliation bill. The president’s plan calls for nearly $2 trillion in spending on a wide variety of social programs that would impact childcare, health care, higher education, climate change, and more. And, as expected, the proposal contains a number of tax law changes on both the spending and revenue side.

How might these changes affect your future income tax bills if the president’s plan ultimately becomes law? First, the framework calls for higher taxes on the wealthy. That’s no surprise, because Biden and Congressional Democrats have said for months that they want to make the rich pay their “fair share” of taxes and use the additional revenue to strengthen the social safety net. The proposal would also extend enhancements to certain tax credits for lower- and middle-income families. These enhancements were designed to help ordinary Americans pay for some of the day-to-day expenses they incur. There are also new or improved tax breaks for higher education costs and green energy initiatives.

At this point, it’s impossible to say which (if any) of the proposed tax law changes will survive and be enacted into law. Additional tax provisions could be added later, too. Nothing is set in stone yet. However, smart taxpayers will get up-to-speed on the president’s tax proposals now, so they’re prepared if/when they make it through the legislative process. To get you started, we’ve identified some of the most common ways President Biden’s latest Build Back Better plan could raise or lower your taxes. After all, what you know now could save you big bucks down the road.

1 of 14

Imposing a Surtax on Wealthy Americans

picture of young rich couple outside their homepicture of young rich couple outside their home

Negotiations over how to pay for the planned social spending provisions have been contentious at times. There seems to be general agreement among the president and Congressional Democrats that higher taxes on the wealthiest Americans should be part of the plan. But nailing down exactly how to tax them has been difficult. The Democrats have bounced back and forth between a laundry list of proposals, including raising the top income tax rate, taxing capital gains at ordinary rates, eliminating stepped-up basis on inherited property, and a “billionaires tax” on the value of unsold assets.

President Biden’s latest Build Back Better plan settles on a “surtax” on millionaires and billionaires starting in 2022. The extra tax would equal 5% of modified adjusted gross income from $10 million to $25 million ($5 million to $12.5 million for married taxpayers filing a separate return). It would then jump to 8% for modified AGI above $25 million ($12.5 million for married taxpayers filing separately). Modified AGI would mean regular AGI reduced by any deduction allowed for investment interest.

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Expanding the Net Investment Tax

picture of three stock traders looking at computer screenspicture of three stock traders looking at computer screens

In addition to the capital gains tax, wealthier Americans may also be hit with an additional 3.8% surtax on net investment income (NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities, and royalties.) This surtax only applies if you’re a single or head-of-household filer with a modified AGI over $200,000, a joint filer with a modified AGI over $250,000, or a married person filing a separate return with a modified AGI over $125,000.

Starting in 2022, President Biden’s plan would expand the surtax to cover net investment income derived in the ordinary course of a trade or business for single or head-of-household filer with a modified AGI over $400,000, a joint filer with a modified AGI over $500,000, or a married person filing a separate return with a modified AGI over $250,000.

The plan also clarifies that the surtax doesn’t apply to wages on which Social Security and Medicare payroll taxes (i.e., FICA taxes) are already imposed.

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Permanently Disallowing Excess Business Losses

picture of worried businessman looking at negative charts and graphspicture of worried businessman looking at negative charts and graphs

There’s one more provision in the president’s latest Build Back Better plan that would heap more taxes (mostly) on the rich. Under current law, business owners can’t deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. Any excess losses can be treated as a net operating loss in later tax years, though.

This business loss limitation rule is currently set to expire in 2027. However, the president wants to make it permanent retroactively beginning with the 2021 tax year. In addition, the president’s plan would only allow excess losses to be treated as a deduction for the next tax year and repeal the limit on excess farm losses by farmers who received certain subsidies. According to an earlier summary of a similar proposal, 80% of the affected business loss deductions would go to people making over $1 million.

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Denying Tax Break for Sale of Small Business Stock by Wealthy Taxpayers

picture of upset rich manpicture of upset rich man

President Biden’s proposal would also choke off a tax break for higher-income Americans who invest in small businesses. Currently, there’s no tax on any gain from the sale or exchange of certain small business stock if you acquired the stock after September 27, 2010, and held it for more than five years. (For qualifying stock acquired from February 18, 2009, to September 27, 2010, 75% of the gain is tax-free.)

The Build Back Better plan would deny wealthier investors this tax break. Under the plan, the exclusion from gross income generally wouldn’t be allowed for gains from the sale or exchange of qualified small business stock after September 13, 2021, if your modified AGI is $400,000 or more. There would be one exception, though. The new rule wouldn’t apply to any sale or exchange made pursuant to a written binding contract that was in effect on September 13, 2021, and not modified in any material respect after that date.

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Curbing Mega-IRAs, Backdoor Roths and Other Retirement Savings for the Rich

picture of three eggs with IRA, Roth and 401k written on thempicture of three eggs with IRA, Roth and 401k written on them

Provisions added to the president’s original plan by House Democrats would curb a wealth person’s ability to stuff money in tax-advantage retirement savings accounts in a few ways. First, beginning in 2029, a new limit on IRA contributions would kick in if the total value of your IRA and defined contribution plans (e.g., 401(k), 403(b), and 457 plans) hits $10 million and your modified AGI exceeds:

  • $400,000 for single filers;
  • $425,000 for head-of-household filers; or
  • $450,000 for joint filers.

A new “required minimum distribution” (RMD) rule would be put in place for mega-IRAs and 401(k) plans starting in 2029, too. Under the proposal, a retirement plan distribution would be required if the combined total of your IRAs and defined contribution plans reached $10 million and your income exceeded the applicable threshold listed above ($400,000, $425,000, or $450,000). Generally, the distribution would equal 50% of the retirement savings over $10 million, but larger distributions could be required if savings surpass $20 million.

The updated Build Back Better plan would also restrict Roth conversions for wealthier Americans. First, beginning in 2022, it would put a stop to “backdoor” Roth IRA conversions. This popular tactic allows wealthier people avoid the Roth IRA contribution limits by making nondeductible contributions to a traditional IRA and then transferring those contributions to a Roth IRA later. However, under the proposed legislation, you won’t be able to convert after-tax contributions in an IRA or qualified retirement plan to a Roth account, regardless of your income. Then, starting in 2032, the proposed plan would eliminate all Roth conversions if your income exceeded the applicable threshold provided above ($400,000, $425,000, or $450,000).

6 of 14

Modifying the SALT Deduction Cap

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Another proposal added by House Democrats would roll back the state and local tax (SALT) deduction limit. This provision doesn’t necessarily fit in with the rest of plan because it would, for the most part, provide a tax cut for wealthy people.

The 2017 tax reform law placed a $10,000 cap on the itemized deduction for state and local taxes until 2026. By limiting the deduction, the cap tends to increase taxes paid by wealthier people, who typically pay more state and local taxes and tend to itemize instead of claiming the standard deduction. Under the revised Build Back Better plan, the cap would be increased from $10,000 to $72,500. However, the higher cap would also be extended through 2031.

7 of 14

Extending the Earned Income Tax Credit Enhancements

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The Build Back Better plan doesn’t just focus on rich people. Jumping to the other end of the income spectrum, the enhancements made to the 2021 earned income tax credit (EITC) that benefit childless workers would be extended for one more year under the president’s Build Back Better plan. The EITC is only available to low- to middle-income workers and families, and the enhancements that would stretch into 2022 were part of the American Rescue Plan, which was enacted in March 2021.

In a nutshell, the EITC improvements for workers with no qualifying children that would be extended to 2022 include:

  • Lowering the minimum age from 25 to 19 (except for certain full-time students);
  • Eliminating the maximum age limit (65), so older people without qualifying children can also claim the credit;
  • Increasing the maximum credit from $543 to $1,502 for the 2021 tax year (the maximum would be adjusted for inflation for the 2022 tax year); and
  • Expanding eligibility rules for former foster youth and homeless youth.

You would also be allowed to base your 2022 EITC on your 2021 income (instead of your 2022 income) if that would increase your credit amount. That’s similar to the rules applicable to the 2020 and 2021 EITC that permitted use of a person’s 2019 income to calculate the credit. This would help people who are laid off, furloughed, or otherwise experienced a loss of income in 2022.

8 of 14

Extending Child Tax Credit Enhancements and Monthly Payments

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President Biden also wants to extend enhancements to another popular tax credit for American families – the child tax credit. That would mean monthly advance payments in 2022, too. The credit would also be made fully refundable on a permanent basis. It’s fully refundable for 2021, but normally only up to $1,400-per-child is refundable, and you must have at least $2,500 of earned income. (With refundable credits, the IRS will send you a refund check if the credit is worth more than your income tax liability.) The president wants to repeal the requirement that each qualifying child have a Social Security number, too.

The American Rescue Plan pushed the amount of the child tax credit for the 2021 tax year from $2,000 to $3,000-per-child for most kids – and to $3,600 for children 5 years old and younger. Those higher credit amounts would continue through 2022 under the president’s plan. However, as with the 2021 credit, the extra $1,000 or $1,600 for 2022 would be phased-out for families with higher incomes. For people filing their tax return as a single person, the additional amount would be reduced if their AGI is above $75,000. The phase-out would start at $112,500 of AGI for head-of-household filers and $150,000 of AGI for married couples filing a joint return. The 2022 credit amount would be reduced further using the pre-2021 phase-out rules if AGI exceeds $400,000 on joint tax returns or $200,000 on single and head-of-household returns. Your 2021 AGI (rather than your 2022 income) would be used for phase-out rule purposes if you so elected.

Under the Biden plan, monthly child tax credit payments during 2022 would max out at $250-per-month for each child between six and 17 years of age, and $300-per-month for each child five years old or younger. However, unlike payments in 2021, monthly payments generally wouldn’t be sent to families in 2022 if their AGI exceeds $75,000 (single filers), $112,500 (head-of-household filers), or $150,000 (joint filers).

With regard to the “safe harbor” rules that let lower-income families keep any excess advance payments, the president’s plan calls for an exception if a child is taken into account for purposes of the advance payments through fraud or the intentional disregard of rules and regulations. The safe harbor amount would also increase from $2,000 to $3,000 ($3,600 for a child five years old or younger).

9 of 14

Extending Premium Tax Credit Enhancements

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The American Rescue Plan made temporary improvements to the premiums tax credit, too. This credit helps people pay premiums for health insurance purchased through an Obamacare exchange (e.g., HealthCare.gov). President Biden’s Build Back Better plan aims to extend the current enhancements.

Provisions that are up for extension under the president’s plan would:

  • Lower the percentage of annual income that eligible Americans must contribute toward their premium;
  • Permit people with an income above 400% of the federal poverty line to claim the credit; and
  • Disregard household income exceeding 150% of the federal poverty line for people receiving unemployment benefits (income exceeding 133% of the federal poverty line is disregarded for the 2021 tax year).

There are new enhancements for the 2022 to 2025 tax years in the president’s plan, too. For instance, there are various provisions in the plan that would temporarily modifies certain eligibility rules and requirements to help lower-income people qualify for the credit. The president also wants to lower the threshold used to determine whether a taxpayer has access to affordable insurance through an employer-sponsored plan or a qualified small employer health reimbursement arrangement. Under Biden’s plan, an employee’s required contribution with respect to such a plan or arrangement couldn’t exceeds 8.5% of his or her household income from 2022 to 2025 (instead of 9.5%). Other provisions would exclude certain lump-sum Social Security benefit payments and the modified AGI of certain dependents 23 years old or younger from the calculation of household income.

In a related move, the president’s plan would also make the health coverage tax credit permanent (the credit currently doesn’t apply after 2021). This credit is only available if you’re (1) eligible for Trade Adjustment Assistance allowances because of a qualifying job loss, or (2) between 55 and 64 years of age with a defined-benefit pension plans that was taken over by the Pension Benefit Guaranty Corporation. The Biden plan would also increase the amount of the credit from 72.5% to 80% of the amount paid for qualified health insurance coverage.

10 of 14

Adding Tax Breaks for Education

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College students would get a few additional tax breaks under President Biden’s plan. First, it would exclude federal Pell grants from gross income.

In addition, tuition and related expenses wouldn’t be reduced by the amount of any Pell grant for purposes of calculating the American Opportunity Credit or the Lifetime Learning Credit.

And, finally, students convicted of a state or felony drug offense would be allowed to claim the American Opportunity Credit. These changes would apply beginning in 2022.

11 of 14

Adding or Improving Tax Breaks for Green Energy and Energy Efficiency

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One of the main goals of the president’s Build Back Better plan is to address climate change. This clearly shows up in the many tax provisions in the plan designed to encourage clean energy and energy efficiency. For instance, the credit for nonbusiness energy property added to your home would be extended through 2031 (it’s currently set to expire at the end of this year). In addition, the credit amount would jump from 10% to 30% of the cost of installing qualified energy efficiency improvements, the $500 lifetime cap would be replaced by a $1,200 annual credit limit, a $600-per-item limit would be placed on credits for qualified energy property, the credit would apply to the costs of home energy audits, and more.

The credit for residential energy efficiency property would also be extended under the president’s plan – this time through 2033 (it’s current set to expire after 2023).This credit applies to the cost of solar, wind, geothermal or fuel cell technology used to generate power in your home. The president’s plan would extend the credit to cover battery storage technology. The full 30% credit would also apply through the end of 2031, then the credit would drop to 26% in 2032 and 22% in 2033. It would also be made refundable beginning in 2024.

Other green energy or conservation tax proposals that would help individuals (as opposed to businesses) include:

  • Excluding water conservation, storm water management, and wastewater management subsidies provided by public utilities, state or local governments, or storm water management providers from gross income;
  • Creating a 30% tax credit for qualified wildfire mitigation expenditures;
  • Establishing a tax credit of up to $12,500 (but not more than the cost of the car) for the purchase of a new plug-in electric motor vehicle;
  • Creating a tax credit of up to $4,000 (but not more than the cost of the car) for the purchase of a used plug-in electric motor vehicle;
  • Extending the tax credit for the purchase of a qualified fuel cell motor vehicle through 2031, but only with respect to vehicles not subject to depreciation;
  • Reinstating the exclusion from gross income for bicycle commuting benefits (they are currently suspended until 2026), and increasing the maximum benefit from $20 to $81 per month (based on 2021 inflation adjusted amounts); and
  • Establishing a tax credit of up to $1,500 for the purchase of an electric bicycle.

12 of 14

Adding Deductions for Union Dues and Work Uniforms

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House Democrats added two temporary above-the-line deductions for workers to the Build Back Better plan. The first would be for up to $250 of union dues. This deduction would be available from 2022 to 2025.

The second deduction would be for up to $250 uniforms or other work clothes that are required as a condition of employment and not suitable for everyday wear. This write-off would be available from 2022 to 2024.

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Subjecting Cryptocurrency and Other Assets to Wash Sale Rules

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People investing in commodities, currencies, and digital assets such as cryptocurrency would be subject to the “wash sale” rule under another proposal added by House Democrats. Currently, trading in those types of assets isn’t covered by the rule.

Basically, the rule states that you can’t deduct a loss from the sale or other disposition of stock or securities if you buy the same asset within 30 days before or after you sell it. Fortunately, though, if a deduction is denied because of the rule, the loss is added to the cost basis of the newly purchased stock. So, when you sell the new stock later, the tax on any gains will be lower.

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Extending Time for Same-Sex Couples to File Amended Tax Returns

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In 2013, the IRS began allowing same-sex couples who were legally married under state law to file joint tax returns. The tax agency also allowed same sex-couples to amend their tax returns to change their filing status to married filing jointly if they were married before 2013. However, they were generally only allowed to file amended returns going back to 2010.

Under a House addition to the Build Back Better plan, same-sex couples who were lawfully married prior to 2010 would be able to change their filing status on pre-2010 returns if they were married during the tax year at issue. This would enable many couples, who were legally married as far back as 2004, to claim or increase credits, deductions, and other tax breaks that were not fully available to them on previous tax returns because they couldn’t file a joint return.

Source: kiplinger.com