Proposed Tax Changes - Highlights

Well, so much for a quiet September when it comes to taxes. I guess we knew it was going to happen eventually. I am referring to the introduction of POTENTIAL tax changes. Potential is emphasized as this is a starting point. This is what was released by the House Ways and Means Committee. And it is known as the American Families Plan.  I am hopeful some of the items in this proposal never make it to actual law, but we will see.

With that background, I am going to bullet-point some of the highlights as I see them. And these are in no specific order. Also, not comprehensive. Let’s get to it.

• Single filers and Married Filing Jointly (MFJ) with respective incomes below $400,000 and $450,000 seem to be safe from any income tax changes…right now.
1. This is lower than what President Biden suggested so my bet is this will increase once it hits the Senate. But, and this is a big but, the President does not write legislation.
• Those above these numbers will see some changes. See below.
1. Tax rates go from 37% to 39.6%. The 37% bracket will go away.
2. The 32% and 35% brackets are being compressed.
3. Capital Gains rates for these income levels will increase to 25% from 20%. The 20% bracket will go away for Capital Gains.
4. The Capital Gains rates changes go into effect immediately as of the day this legislation was proposed (This is the first item I don’t see making it past the final version, but what do I know).
5. Also, the proposed Cap Gains rate is lower than what the President proposed. Stay tuned on this one too.
• Backdoor Roths would be eliminated starting 2022. This hurts as it is one of my favorite and most effective strategies for tax-free income in retirement. At this time, you can still do one for 2021, but it has to be fully done this year.
• Roth Conversions for those in the above top income brackets would be phased out by 2031.
• Oh, there will be a new tax term too. Adjusted Taxable Income. This will come into play for things like Roth Conversions for high income earners.
• Gift and Tax exemption amounts would be cut in half starting 2022. I’ve seen numbers of both $5 million and $5.8 million. Not sure which is correct, but I lean toward the larger number. So much for a quiet fall for attorneys, although they love the billable hours😉
• Also, if you are above the top income level and have $10 million in IRAs and Roth IRAs, you can no longer contribute.
• However, with the above change, this ONLY applies to money in IRAs and Roth IRAs. So, if you fall into this camp, you can still contribute to 401ks, SEP IRAs, and some pension plans. You can still save, just not in the IRAs and Roth IRAs. This is a “WHAT THE HELL” moment for me.
• Those with the above incomes ($400k Single, $450k Joint) and have between $10 million and $20 million in retirement accounts, your RMD would be 50% of anything over $10 million. Yes, you read that right.
• But wait, there’s more. If you have more than $20 million in retirement accounts, the amount over $20 million would be subject to a 100% RMD. As Ralphie from A Christmas Story said – FUDGE!!!
• A lot of the above is what I call the Thiel rule. In case you aren’t familiar with it, Peter Thiel (tech mogul who spends a lot on political donations such as in the Ohio Senate race right now) turned a $2,000 Roth IRA investment into a $5 billion pot that will never be taxed. The reporting on this caught the ire of Congress.
• There are also lots of proposed changes to different types of trusts and also businesses. I am not going to tackle those for two reasons. First, I am not an attorney and I will leave the trust analysis to attorneys. Second, most of my clients do not fall under the proposed changes to business rules. For those that do, I am sure I will be spending more time with their CPAs.
• Last bullet point. Corporate tax rates will go from a flat rate of 21% to a progressive rate up to 26.5%.

Finally, a quick mention of things not in this version of the bill.

• No elimination of the Step-Up in Basis. This is something the President wanted.
• No changes in SALT cap. I bet this does go up in the final version.
• No additional funding for Social Security.
• No wealth tax. You know, the stuff that would apply to people like Jeff Bezos who are worth billions but can go years without paying income tax. Although many of us would love to see something like this as opposed to just going after those with actual income, odds are it would be considered unconstitutional.

Again, I want to stress this is just proposed at this point. The final form will look different, however, many of the features will become law. I do expect something to be finalized and signed this calendar year.  Honestly, most of the changes will have little to no impact to most people as they are below the income thresholds and don’t do things like Backdoor Roths and Roth Conversions.

I do hope your CFP® is on top of things and talking to you about it, not just sending some prepackaged narrative created by someone who knows nothing about your personal situation. I know I already am with my clients. Heck, this went out to my clients several days ago. There are advantages to being a client😊