Federal Tax Proposal – A Summary

TAX

The Biden administration recently announced a number of tax proposals to fund new government investments. The current version may not be the final form, but many of its features are likely to become law. Below is a summary of what is most likely to impact families.

Income Tax Rates

  • Increase in the marginal tax rate: The top marginal tax rate would increase from 37% to 39.6% for income greater than $400,000 if you file as single and $450,000 if filed as married filing jointly (MFJ). These changes would go into effect for the 2022 tax year.

 

  • Increase in the top long-term capital gains rate: The highest marginal long-term capital gains rate would increase from 20% to 25% for incomes higher than $400,000 (single) or $450,000 (married filing jointly). The change in rate to 25% would be effective as of September 13, 2021 unless a sale was already under contract prior to that date.

 

  • S Corporations: Business profits from S corporations will be subject to a 3.8% surtax for taxpayers with Modified Adjusted Gross Income (MAGI) above $400,000 (single) and $500,000 (MFJ).

 

  • Section 199A QBI Deduction: To be phased out for those earning over $400,000 (single) or $500,000 (MFJ).

 

  • Additional 3% surtax on ultra-high income: An additional flat tax of 3% would be applied on any MAGI above $2,500,000 for individuals filing as married filing separately or above $5,000,000 for MFJ or single.

Retirement Strategies and Plans

  • Roth conversions will no longer be allowed for high income individuals:
    • New rules would prohibit all Roth conversions for taxpayers in the highest ordinary income tax bracket (39.6%) beginning January 1, 2032.
    • Roth conversions of after-tax funds will be prohibited for ALL taxpayers beginning January 1, 2022. This would eliminate backdoor Roth as a planning strategy.

 

  • Restricts contributions to IRAs or Roth IRAs for high net worth individuals if:
    • Taxable income is greater than $400,000 (single) or $450,000 (MFJ) AND the total value of IRA and defined contribution plans exceed $10,000,000.
    • The limitation does not apply to contributions of employer plans such as a 401(k), SEP IRA, or pension plan.

 

  • Change in Required Minimum Distributions (RMD) for individuals whose aggregate retirement account size exceeds $10,000,000:
    • Imposes RMDs on large retirement account balances if:
      • Taxable income is greater than $400,000 (single) or $450,000 (MFJ), AND
      • The total value of IRA and defined contribution plans exceed $10,000,000

 

  • If combined balance is between $10,000,000 and $20,000,000, the owner must distribute 50% of the amount of the account balances in excess of $10,000,000.
  • If the balance is greater than $20,000,000, the RMD would be 100% in excess of $20,000,000, plus 50% of any amount over $10,000,000.

Additional Changes

  • Wash Sale rule: This will be expanded to include cryptocurrency and other digital assets, commodities, and foreign currencies.

 

  • Estate Tax Exemption would be reduced: Would revert back to $5,850,000 per person and $11,700,000 per couple. This was scheduled to happen in 2026, but under the new proposal, it would get accelerated to 2022.

 

  • Increased child tax credit and monthly advance payment extended until 2025: Monthly advance payments of $250 per qualifying child aged 6-17 and $300 per child below the age of 6 would continue.

 

  • Assets held within grantor trusts may become part of taxable estate: This would potentially eliminate the benefit of certain estate planning techniques, namely Irrevocable Life Insurance Trusts (ILITs).

Author

  • Dennis McNamara, CFP®, CHFC®, AIF®, CSLP®

    Today, as co-founder of wHealth Advisors, I find immense fulfillment in knowing that we use our platform as a force for good. As a firm, we’re founded on the industry’s highest standards for ethics and transparency while also offering pro-bono services to those in need. Financially, we donate a portion of our gross revenue annually to qualified 501(c)3 organizations (which are nominated + voted on by our clients). Personally, though, I find the greatest satisfaction in helping my clients gain financial peace of mind through prudent money management. Prudent money management is like a positive feedback loop: when we are no longer burdened by finances, other dimensions of our lives also tend to improve. As we continue to grow we realize that as important as money is, those other dimensions of life are equally (if not more!) important. As modern philosopher Naval Ravikant reminds us: “The three big ones in life are wealth, health, and happiness. We pursue them in that order, but their importance is reverse. A calm mind, a fit body, and a house full of love. These things cannot be bought.” My life’s mission has been dedicated to helping others use money to close the gap between who they are today and the best version of themselves that awaits ahead. I am excited to meet you and look forward to the opportunity of working together on your journey to financial independence! Designations: - Certified Financial Planner™ - Chartered Financial Consultant® - Accredited Investment Fiduciary® - Certified Student Loan Professional® Featured in: - Forbes - U.S. News & World Report - Financial Advisor Magazine Outside of wHealth Advisors: - Educating myself more on: Stoicism, permaculture, climate justice, systemic racism, health & longevity science - Happiest when: outdoors with wife, Arabelle, and son, Manny - Stays active with: strength training, functional range conditioning, hiking, cycling, surfing, and yoga - Financially splurges on: Single-origin coffee

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