November 1, 2021

Proposed Tax Changes

“American Families Plan”
Top 10 Takeaways
1. Income Tax Proposals:
  • No changes to the 10% – 32% brackets
  • The top marginal rate to increase from 37% to 39.6%
    • This applies to income above $400,000 (single) and $450,000 (MFJ)
  • Compressed 35% bracket
    • Prior = $418,851 – $628,300
    • Proposed = $418,851 – 450,000
  • Households with incomes between $400K – $800K will see greatest impact in terms of a percentage increase
  • Households nearing the 37% bracket will be affected the most, with a straight jump from 35% – 39.6% once crossing over $450K
    • Current:
      • $418,000 – $628,300 = 35%
      • $628,000 = 37%
    • Proposed
      • $418,000 – $450,000 = 35%
      • In other words, there is now less room before hitting the top tax bracket ($178,300)

2. Capital Gains: 
  • Increased rate from 20% – 25%
  • Original proposal was to tax capital gains as ordinary income
  • If enacted the effective date will be a lookback to 9/13/21, with any capital gains after this date being subject to top 25% rate
  • This applies to income levels over $400,000

3. S Corps:

  • Business profits from S Corps will be subject to 3.8% surtax for MAGI > $400k single and $500k MFJ
    • MAGI does not consider below the line deductions
    • for most, MAGI is the same as AGI
    • True top rate for S Corp owners would increase from 37% to 43.4%
  • The $400k / $500k marks are not the S Corp profits. They INCLUDE the S Corp profits but they are MAGI numbers. So if you only have S Corp profit of $100k but have a W2 that pushes you above, then all of the S dividends are hit with 3.8% tax.
  • Single and MFJ both have a $100k phase out range, moving from none of S dividends included to having all included for 3.8%
  • Example 1:
    • $50k W2 salary from S Corp
    • $350K profit and S dividend
    • $50k + $350k = $400k (none of the profit would be considered for 3.8% tax)
  • Example 2:
    • $50k W2 salary from S Corp
    • $450k profit and S dividend
    • $500k (threshold is exceeded, all of the S Dividend is now taxable despite the only change being profits)

4. Roth Conversions:

  • Starting 1/1/2032, Roth conversions are prohibited for taxpayers in the highest ordinary income tax bracket (39.6%)
    • Advantageous to accelerate conversions over the next 10 years, increasing tax revenue now
  • Starting 1/1/2022, Roth conversions of after-tax funds in retirement accounts are prohibited for all taxpayers (Backdoor Roth and Mega Backdoor Roth)
  • Currently no proposed provisions for recharacterizations

5. Prohibited contributions:

  • Traditional and Roth IRA contributions prohibited if:
    • Taxable income > $400k (single) or $450k (MFJ)
    • total value of IRA and defined contributions plans > $10,000,000

6. RMD’s on large retirement balances for high income clients (must have both):

  • If income is above $400k (single) or $450k (MFJ) combined with retirement account balance is greater than $10,000,000, must distribute 50% of the excess
  • If the retirement balance is > $20,000,000, must satisfy the 50% RMD, but FIRST distribute the lesser of…
    • 100% of balance above $20,000,000 or
    • 100% of balance in ALL Roth accounts

7. Substantial Interest:

  • IRA’s prohibited from investing in entities in which the owner has a “substantial interest” effective 1/1/2024
    • public company threshold: 50% ownership
    • privately-held company threshold: 10% ownership
    • directors and officers would also be prohibited
    • this only applies to IRA’s

8. Statute of Limitations:

  • Statute of Limitations for IRA non-compliance expanded from 3 years to 6

9. Wash Sale Rules: 

  • The following asset types subject to new rule beginning in 2022:
    • Cryptocurrency and other digital assets
    • Foreign currencies
    • Commodities
  • Purchases by the following would trigger the wash sale rule:
    • Spouse
    • Dependents
    • Controlled entities
    • Controlled tax-favored accounts

10. Estate Planning:

  • Starting 1/1/2022, estate tax exemption reduced by 50%
    • Reverts exemption to pre TCIA levels
    • New exemptions: $5.85M per person / $11.7M per couple
  • Changes to Grantor Trusts
    • Includes grantor trusts in decedent’s estate
    • Would impact GRATs and ILITs


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