Proposed Tax Law Changes
By: Cameron Diehl, CFP®
Friends – The potential for changes to the tax code as part of various proposed infrastructure packages has been on investors’ mind’s for months now.
With the most recent draft legislation from the House Ways and Means Committee released on September 13, we finally have a more clear view of proposed changes.
The scope of proposed changes is vast and final passage will involve significant debate and negotiations as part of the broader budget process, but I wanted to share some the key provisions for individuals below as we head into year-end.
- Increased top marginal income tax rate – Beginning for taxable years after 12/31/2021, the top rate for ordinary income would increase to 39.6% from 37.0% and kick in at a lower $450k threshold for married couples filing jointly (vs. $523,600 currently).
- Increased top long-term capital gains rate – For transactions occurring after 9/13/2021, a new top rate of 25% beginning at the same $450k threshold for married couples filing jointly. Combined with the 3.8% Medicare surtax this would bring the top rate on long-term capital gains to 28.8%.
- New 3% surtax for households exceeding $5 million in income – Beginning for taxable years after 12/31/2021 with modified adjusted gross income as the measure.
- Reduced lifetime estate and gift tax exclusion – Beginning next year, reverting the lifetime limit from the current $11.7 million per person to the previous $5.49 million (adjusted for inflation).
- Expanded 3.8% surtax on net investment income – A new provision subjecting active business income to the surtax above $500k income for married couples filing jointly (as opposed to only passive income currently).
- Restrictions on large IRA balances – Beginning for taxable years after 12/31/2021, disallowing contributions and triggering required distributions once an IRA balance exceeds $10 million with additional requirements over $20 million. Only applies to taxpayers with taxable income exceeding $450k (married filing jointly).
- Backdoor Roth IRA conversions disallowed – Beginning for taxable years after 12/31/2021, limits Roth conversions to pre-tax funds. Also disallows Roth conversions for taxpayers with income exceeding $450k (married filing jointly).
- Prohibition on certain investments within IRAs – Beginning for taxable years after 12/31/2021, investments required “accredited investor” status are not allowed in an IRA, as well as certain assets where the owner has a beneficial interest (i.e. 50% or greater interest). A two year transition period will apply for current holdings.
- Changes to tax treatment for grantor trusts – Effective on enactment (when legislation is signed into law), among other changes, assets held within grantor trusts are included in the decedent’s taxable estate if determined to be the owner of the trust.
- Not included – Of note, nothing was included in this proposal eliminating the step-up in basis on inherited assets or removing the state and local tax (SALT) deduction cap, both of which had been discussed.
Tax strategy is a core part of my process when working with clients and these proposals, if enacted, will have a far reaching impact. If you have any questions about any of the proposed changes and how they might impact your personal planning, please don’t hesitate to reach out. I’m always happy to help.
On a personal note, we hope everyone has had a great start to the new school year despite some of the uncertainties. The big news in our house is having a Kindergartener for the first time! It’s been fun watching him adjust to the “big kid” school and everything new that comes along with it. Time />sure does fly! Photo form the first day attached.
Any opinions are those of Cameron Diehl and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.
