As with most tax law changes, one’s income can be a significant indicator of how these proposed changes could affect you tax wise.
First, let me say, these potential changes are just that. Potential. These have not passed as of this writing. I do believe many of these items will pass however, there could be some tweaking of the actual amounts. Also, bear in mind, these changes aren’t exactly what President Biden had in mind, but rather what the House Ways & Means Committee came up with on September 13th of this year.
Lastly, this bill is huge so I’m only touching on some of the more key points that might affect some people. There are provisions for business owners a well as certain trusts.
Okay, here we go:
- First off, those with an Adjusted Gross Income of over 400k for single filers and 450k for married filing jointly will see their marginal tax rate go from 37% to 39.6%.
Currently, below this 39.6% proposed bracket we have a 37% tax bracket. I believe this 37% bracket will go away and therefore, those that could have been in that bracket, will now jump right into the 39.6% bracket.
Rick’s Tip! If you are nearing this 400k + level of income, accelerating income in 2021 could be a smart move.
- Top Capital Gains tax rate will go from 20% to 25%. The Biden plan proposed a 39.6% rate for those with income of $1,000,000 but this bill kicks in this new rate of 25% at an income of 400k.
What is interesting is, any capital gains tax realized on 9/14/2021 or later will be subject to this new rate. Example, you sold stock on 9/14/2021, you would be subject to the new 25% rate. (Assuming you exceeded the new income level of 400k +).
Rick’s Tip! If you are nearing this 400k + level of income, and you have quite a bit of capital gains, it could make sense to do some tax loss harvesting to minimize these taxes in before year end in 2021.
- Roth Conversions. Right now, there are no limitations on income to do a Roth IRA conversion. This new proposed law starting on January 1, 2032 prohibits folks to convert if they are in the 39.6 tax bracket.
Rick’s Tip! Consider doing Roth IRA conversions before 2032 if Roth conversions are right for you.
If you have IRA’s with after tax dollars and want to do a conversion, you must do so before year end.
For those that have 10 million or more in an IRA, you cannot contribute any money into these accounts. (There are also some wacky rules regarding Required Minimum Distributions if one has an IRA with $10,000,000 or more)
Rick’s Tip! If you have $10,000,000 or more in an IRA, you probably don’t need to make further contributions.
- Estate Planning. Starting January 1, 2022, the current estate tax exemption will be cut in half to 5.85M for individuals and 11.7M per couple.
Rick’s Tip! If you are in this group, there are strategies we can employ to lower estate taxes. In fact, those that live in states with much lower exemptions i.e. Massachusetts @ $1,000,000, there are things we can do to help you are well.
- Step-Up in basis. One thing that is NOT in the Bill, is the elimination of the step-up in basis. President Biden proposed an elimination of this rule which would have potentially made inherited assets much less favorable tax wise. (Let alone a tax nightmare for one settling an estate) What does step-up in basis mean?
Currently, when one passes away, the value of their assets i.e. house, stocks, mutual funds, etc. would get “stepped-up” to the value at death. Francesca dies this December 27th and her stocks are worth $500,000 on that day which she leaves to her daughter Billie. Billie can sell those stocks that day and pay no capital gains tax. (Assuming she sells them for the same price they were when her mom passed away. If, when she sold them, they were worth $500 more then on the date of death, Billie would only have to pay capital gains tax of the $500).
This blog only scratches the surface of this bill. I’m happy to discuss in more detail on how these potential changes can affect you.
As always, when making big financial decisions, it is always best to speak with and take the advice of a Certified Financial Planner® practitioner. Any questions, we are here to help you figure it all out.
Want to schedule a quick complimentary call with me? Click HERE to see my online calendar
Click HERE to receive our award-winning newsletter. We never share your info, and you can unsubscribe at any time.
All the best.
Rick Fingerman, CFP®, CDFA™, CCFS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.