The roughly $2 trillion climate and social policy measures passed by House Democrats on Friday will create a mobile tax scenario for families in the next few years, as tax provisions affecting low- and high-income earners will be phased out.
The Rebuild Better Act contains tax components related to children, health care, education, state and local taxes, corporate profits, and retirement plans.
But according to forecasts, their start date and duration are different-this dynamic may have a significant impact on taxpayers’ taxation each year.
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Garrett Watson, a senior policy analyst at the Tax Foundation, said: “For people at the bottom and the top, net tax changes are a bit like a roller coaster.”
Watson said the legislative roller coaster is similar to the 2017 tax law passed by the Republican-controlled Congress. The law enacted many temporary tax cuts for individuals and families, which will expire after 2025.
Tax the rich
The goal of President Joe Biden and Democratic lawmakers is to increase taxes on households with annual incomes of more than US$400,000 or the wealthiest 1% to 2% of the population, in order to support investment mainly for low- and middle-income earners.
According to estimates released on Friday by the Congressional Tax Scorer’s Joint Taxation Committee, legislation passed by the House of Representatives will increase the taxation of high-income earners by approximately $640 billion within a decade.
However, according to estimates by the Joint Commission, in the first year of legislation, it will provide Americans earning more than $1 million with a greater relative tax cut than Americans earning between $75 and $1 million.
Compared with the current law, the total tax revenue of the highest-income people in 2022 will be reduced by 46.8 billion U.S. dollars, or 5.4%. For example, the relative tax cut for people with incomes between US$100,000 and US$200,000 is smaller, at 3.2%. Those with an annual income of less than $75,000 will receive greater relief than the richest taxpayers.
(These are averages for all taxpayer groups, which means that the experience of individual families may differ from these figures.)
The House of Representatives legislation may change in the Senate. Starting in 2022, a 5% surcharge will be imposed on income exceeding $10 million, and a 3% surcharge will be imposed on income exceeding $25 million. It will also levy taxes on some business owners.
However, the wealthy will receive a reduction in state and local taxes next year. Families can deduct up to $80,000 in state and local taxes from the federal tax bill—a significant increase from the current $10,000 cap.
According to tax experts, on average, this change will help offset the higher taxes imposed on the wealthy by other measures. According to data from the Institute of Taxation and Economic Policy, by 2022, about three-quarters of SALT deductions will go to the richest 5% of taxpayers.
Low-income and middle-income earners will receive tax cuts through the expansion of the child tax credit and labor income tax credit, with the largest gains going to the lowest-income earners.
They will also receive financial relief from expanded premium tax credits, which usually make health insurance purchased on the state or federal market more affordable.
However, the tax dynamics will change after 2022. New tax provisions affecting the wealthy will begin to be implemented, temporary tax cuts for low- and middle-income earners will end, and Congress will not postpone it in the future.
“In some respects, the impact of the bill on taxes in 2022 does not represent how it will change our tax laws,” said an analysis by the Institute of Taxation and Economic Policy.
For example, the expanded child and labor income tax credit expires in one year.
According to the forecast of the Joint Commission on Taxation, in 2023, households with incomes between US$50,000 and US$75,000 will roughly balance their income and expenditures after a tax cut of 8.6% in the previous year.
Those with an annual income of less than $50,000 can still get an average tax reduction through other measures, such as an expanded premium tax credit, which will expire after 2025. The legislation also provides deep-rooted benefits for the lowest income earners through the permanent refund of the child tax credit.
It is expected that higher taxes on corporate profits will be levied on corporate profits from 2023, which will also affect the highest income taxpayers to a large extent. (This will be achieved by substituting a 15% corporate minimum tax.)
Watson said the tax impact will be indirect-if the value of company stocks and bonds falls due to higher corporate taxes, this dynamic will primarily affect the wealthy, most of whom own such assets.
For example, according to estimates by the Joint Commission, after tax cuts of more than 5% in the previous year, the taxes of the wealthiest Americans will increase by 5.1% in 2023.
In addition, by 2031, the upper limit of state and local tax deductions will be restored from US$80,000 to US$10,000. Many wealthy taxpayers would bear larger taxes that year because they were able to write off much less taxes.
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