By Joe Delaney
2021 Proposed Tax Changes
By now, you’ve likely seen that the House Ways and Means Committee released a draft of major tax legislation on September 13th.
I wanted to provide you with a quick summary of some of the key points of the proposed legislation (as best I can glean at the present time):
- Single filers with income below $400,000 and Married Filing Joint filers with income below $450,000 will probably not see the significant impact right away.
- Taxpayers with income over those thresholds should expect higher marginal rates and higher capital gains rates.
- The bill brings back the 39.6% marginal bracket on ordinary income while compressing the existing 32% and 35% brackets
- For folks over the $400K/$450K thresholds, capital gains increase from 20% to 25%. While unpleasant, recall that President Biden's original proposal included a top capital gains rate of 39.6%.
- The regularly used Lifeguard Wealth strategy of making non-deductible IRA contributions and then converting them to a Roth IRA - or the "backdoor Roth" - looks like it's on its way out starting in 2022. The same goes for the "mega backdoor Roth" strategy inside of 401k plans.
- Increases to both the Child Tax Credit and the Child and Dependent Care Credits
- Elimination of Roth conversions for folks over the income thresholds...but not until 2031!
- The gift and estate tax exemption amounts would effectively be cut in half starting in 2022. That would still be over $5 million/person, though.
- Application of the 3.8% Net Investment Income Tax (NIIT) to S-corp distributions for taxpayers with income higher than $400,000 (individual) or $500,000 (married filing jointly).
- Limitations of the QBI Deduction (199A deduction) for high-income taxpayers
There's plenty more in the bill, but these are the points that look to apply to most people. One additional item worth keeping track of is a 3% surcharge on very, very high-income people. But that's also going to apply to trusts with an income of over $100,000. For clients who have left IRAs to a trust for the benefit of minor children, this income threshold may come faster than you think given the 10-year requirement to deplete an inherited IRA.
We'll continue to monitor this legislation as it works its way through Congress, and we'll be quick to update you if/when anything becomes law.
If you have any questions about these tax changes and your personal situation, please don’t hesitate to reach out.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
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