Seven Potential Tax Implications of the September 2021 American Families Plan Proposal

Our financial planning team has been reviewing the latest American Families Plan proposal that was released mid-September. While it is still merely a proposal and has a long way to go to become law, we wanted to point out seven areas that we are watching closely as they could impact many of our clients if it goes into effect. As with all matters related to your taxes, please consult your accountant.

#1: Tax rates are going up in 2022 for individuals with more than $400,000 and couples with more than $450,000 of taxable income.

The highest marginal tax rate will likely be 39.6%, but only for individuals with more than $400,000 and couples with more than $450,000 of taxable income. Keep in mind, the highest brackets are compressed so taxpayers will reach the highest marginal tax rates on income more quickly. Trusts and estates will incur the highest marginal tax rate of 39.6% with taxable income over $12,500.

Single – Current Single – Proposed MFJ – Current MFJ – Proposed
35% $209,426 – $523,600 $209,426 – $400,000 $418,851 – $628,300 $418,851 – $450,000
37% $523,601+ $628,301+
39.6% $400,001+ $450,001+

#2: Capital gains tax rates already did go up!

Long-term capital gains tax rates on those with the highest incomes will likely be 25% rather than the current 20% rate. This rate would also apply to any capital gains realized after September 14, 2021.

Single – Current Single – Proposed MFJ – Current MFJ – Proposed
15% $40,401 – $445,850 $40,401 – $400,000 $80,801 – $501,600 $80,801 – $450,000
20% $445,851+ $501,601+
25% $400,001+ $450,001+

#3: Last call for backdoor Roth conversions.

Conversions of after-tax dollars in IRAs and 401(k)s would be prohibited beginning in 2022.

#4: Roth conversions for those with high incomes will be eliminated beginning in 2032.

Those individuals with taxable income over $400,000(S)/$450,000(MFJ) will be barred from converting any type of dollars (after-tax or pre-tax) from IRA or 401(k) to a Roth account.

#5: Termination of temporary increase in unified credit amount.

The unified gift and estate tax exemption amount (or the “credit” applied to an estate tax liability), which currently allows every individual to pass $11.7M to beneficiaries, without gift or estate tax liability will likely be sunset at the end of 2021—rather than at the end of 2025 as currently stated in the law. The new exemption amount will be roughly half and only allow each individual to pass $5M (in 2010 dollars) indexed for inflation (approximately $6M in 2022) either during life or at death.

#6: New RMD requirements for high income earners with “mega” retirement account balances.

For individuals with more than $400,000(S)/$450,000(MFJ) of taxable income AND aggregated IRA, defined contribution plans, and Roth IRAs with balances that exceed $10M at the end of the prior tax year will be subject to an RMD.

For individuals with a balance of $10M-$20M, the RMD will be 50% of the amount in excess of $10M.

If the high-income earner owns a Roth IRA AND their aggregate balance of all retirement accounts and the Roth IRA is in excess of $20M, they would be required to distribute the lesser of:

  • 100% of the amount in excess of $20M, or
  • The total balance of all Roth accounts (IRA, Roth 401(k), etc.)

#7: High income S-corporation owners could end up paying the additional 3.8% NIIT on their S-corporation profits.

  • For taxpayers above applicable thresholds of $400K Single and $500K Married Filing Joint.
  • There are some calculations to be made and phase-ins, but if applicable this could increase the top federal income tax rate for S-Corporation owners from 37% to 43.4%.

If you have any questions about anything mentioned above, please contact your financial advisor and/or accountant. Again to reiterate, this is not law at this time. We will continue to monitor the proposal and alert our clients if and as needed.

—-

Source: waysandmeans.house.gov/media-center/press-releases/chairman-neal-announces-additional-days-markup-build-back-better-act

Disclaimer: The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed and information provided is meant to provide general information for educational purposes only and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results.

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