The Tax Man Cometh…

Legislation moving through our federal government right now includes a number of new tax proposals. Nothing is final, but I thought it would be helpful to see where the plan is heading and any actions that we should consider.

1. The high end of the ordinary income tax bracket is proposed to be moved back up to 39.6% at a much lower income level – and the marriage penalty is back.

Currently the 39.6% rate would apply in 2022 for taxable income over $400,000 (single), $450,000 (married filing jointly). The chart below demonstrates that it is going to take less income to be moved up into this higher bracket.

The higher income threshold is very close for single and married filiers ($400k v $450k). The marriage penalty is back and higher taxes may result due to one’s filing status. For some of you it may make sense to accelerate some income into 2021.

2. 25% tax on dividends and long-term capital gains

They’ve added a wrinkle with this increase. It is to be effective 9/14/2021 – as in two weeks ago. Long term capital gains incurred after this date could be taxed at 25% (from 20%). However, this proposal lines up with the income tax changes and will only apply to capital gain income above the $400K (single) and $450K (married filing jointly) thresholds.

They added this date provision, in my opinion, to deter investors from selling their stock into year-end to avoid the tax in 2022.

3. Roth IRA’s, Roth 401(k)’s and Roth conversions

Personally I am surprised that some of these Roth provisions made the bill. When after-tax monies are invested they are exactly that – AFTER TAX. If I’ve ever seen a group more interested in getting their funding today rather than tomorrow it is our federal government. That notwithstanding, they are planning to eliminate Roth IRA conversions for higher income limit investors beginning in 2032.

These conversions have been a useful tool for reducing the tax burden that tends for clients that are taking large required minimum distributions from their regular IRA’s. We have ten years to plan under this rule change and will need to be proactive to find the right solution for your situation. I’m on it!

Roth 401(k)’s don’t appear to be impacted at this time. They will continue to be a useful tool for many through your employer retirement plans.

More changes are coming as well to estate exemptions, certain types of trusts and family limited partnerships.

As of this writing, it appears Republican senators are planning to try and block a number of these proposals. The debt ceiling debate is now being wrapped into these negotiations as well. All that to say we are likely to see more changes. I’ll continue to watch the developments and report back as needed.

Be well!

Matt

Source: “Chairman Neal Announces Additional Days of Markup of the Build Back Better Act.” Ways and Means Committee – Democrats, 13 Sept. 2021, https://waysandmeans.house.gov/media-center/press-releases/chairman-neal-announces-additional-days-markup-build-back-better-act