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A New Tax Plan is Taking Shape: Will you be Affected?

The new tax proposal is taking shape, yet we don’t expect to know the final details until later this year. The proposal’s package of tax changes is in the early stages of the legislative process and will likely evolve from there.

The U.S. House Ways and Means Committee voted to approve a proposed package of tax increases to help fund the $3.5 trillion Build Back Better Act. The Senate still needs to approve the proposal, and it will likely change before a final bill is passed.

Outlined below are some of key tax changes in the proposal:

  • Increase in top individual income tax rate to 39.6%, up from its current rate of 37%, as well as a reduced threshold for the highest income tax bracket to $450,000 for joint returns ($628,300 currently) and $400,000 for individual returns ($523,600 currently). This would go into effect January 1, 2022.
  • Increase in long-term capital gains tax from 20% to 25% for couples earning more than $450k and for individuals earning more than $400k. This proposal would be retroactive back to September 13, 2021. So, gains realized on or after September 13, 2021, may be subject to this new higher capital gains rate. It’s important to note that the original plan had an increase to 39.6% capital gains rate but only for those with incomes over $1,000,000.
  • 3% surtax on incomes higher than $5 million. This also would go into effect January 1, 2022.
  • Reduction in estate tax exemption from $11.7 million to $5.8 million starting January 1, 2022. Note, the step-up in cost basis rule would stay in place—it was targeted to be discontinued under prior proposals.
  • New contribution limit to retirement accounts with balances of more than $10 million. Individuals with an aggregate balance of more than $10 million in their retirement accounts–and who are in the highest tax bracket–will not be able to contribute additional savings to tax-advantaged accounts.
  • Change corporate taxes to a tiered system. Corporations with incomes:
    • Less than $400k, reduced rate to 18%
    • Between $400k to $5 million, rate stays the same at 21%
    • Greater than $5 million, rate rises from the current 21% to 26.5%

What can you do now to prepare for higher taxes and other tax changes?

Keeping in mind that the proposed tax plan is likely to change in the coming weeks, possible action steps in anticipation of tax code changes in 2022 include:

  • Accelerate ordinary income in 2021. The proposed new top income tax rate would increase from 37% to 39.6% and starts at $450k MFJ (Married Filing Jointly), where current top rate starts at $628k MFJ.
  • Defer deductions. State and Local Tax (SALT) payments that are above the current limit of $10,000 and were not deductible in 2021, may be deductible in 2022.
  • Convert IRA to Roth IRA. New limits may be enacted, restricting Roth conversions for incomes of $450k+ MFJ. The new limits will not be in force until 2032, leaving a 10-year window for Roth conversion for high income earners still open.
  • Give Money Away. The lifetime gift limit may be reduced to $5.8 million (currently $11.7 million per individual). Gifts made in 2021 won’t be clawed back if exemption limit is lowered.

Additionally, if you are in the higher tax bracket you may consider maximizing contributions to tax deferred retirement accounts, investing in municipal bonds, or increasing charitable donations by year end. If you are affected by capital gains increases, you can tax loss harvest so that the losses can offset gains already realized this year or you can hold assets longer until you are in a lower tax bracket.

There will still be time to consider tax strategies by year end if the proposed tax changes are passed and impact you.

It’s best to wait to see what the actual outcome of the tax proposal is in October or November, since there will most likely be many changes and negotiations in the next few months. If the Build Back Better Act is scaled back, which is likely, then less tax increases will be needed.

Sources :

  • Townsend, M., Hayden, W. (2021, September 16). Will Taxes Rise for the Wealthy?
  • Stone, A. (2021, September 15). Major Tax Changes are in the Works. What Advisors Need to Know.

Author Profile

Donna Zinman

The Author: Donna Zinman

Donna Zinman is a Principal and Senior Financial Advisor at Capital Advantage. She is a Chartered Retirement Planning Counselor (CRPC®) and an Investment Advisor Representative. As a Senior Financial Advisor, she is part of the investment team and is responsible for establishing new client relationships, managing investment portfolios and financial planning, as well as firm marketing and human resource management. Donna specializes in working with women in transition: about to retire, newly retired, widowed or divorced.