April in September

Let’s talk about taxes!  I struggled to add an exclamation point at the end of that sentence, but I battled through.  Taxes are boring, sure—but impactful.  And it looks like we’re headed for a slew of tax law changes in 2022.   

On September 13, The House Ways and Means Committee provided a second draft of the American Families Plan, which was released back in April.  There are some notable changes from the original version.  Of course, this will get remodeled several times over the coming weeks, but it provided us with some insight on changes that are likely to come.  

In an effort to save your eyes from a massive information dump, I’ll hit some of the highlights as it pertains to our core client group.  As with any tax-related advice, we highly encourage you to consult with your tax professional—we’re happy to be part of that conversation. 

PROPOSED CHANGES THAT MAY IMPACT INDIVIDUALS & FAMILIES 

  1. New top income tax rate 

Not only is the proposed top rate higher—39.6% vs. 37%– but the income threshold is lower–$450,000 for married filing jointly vs. $628,301. 

  1. New top capital gains rate 

The current top capital gains rate is 20%–the proposal increases this to 25% (Note: the plan in April had the rate at 39.6%), and again lowers the income threshold.  It’s important to note that this is the only proposed change that would go into effect immediately, potentially affecting capital gains tax calculation in 2021. 

  1. New 3 percent surtax (or “surcharge”) 

This would only apply to those whose income exceeds $5,000,000 (single or married filing jointly), bumping the highest tax bracket to 42.6%. 

  1. Prohibition on after-tax conversions 

The new proposal would eliminate strategies such as the “Backdoor Roth IRA” or the “Mega Backdoor Roth IRA” where after-tax dollars are converted to Roth IRA assets.  Additionally, the proposal plans to eliminate Roth conversions entirely for higher-income earners, but not until 2032. 

  1. Reduction in the Unified Credit amount 

Back in 2018, the unified estate and gift tax exemption was increased to (an inflation-adjusted) $10,000,000 from $5,000,000 as part of the Tax Cuts and Jobs Act.  That was set to sunset back to (an inflation-adjusted) $5,000,000 in 2025.  The proposal accelerates this sunset to 2022. 

  1. Elimination of the “Defective” Grantor Trust 

An Intentionally Defective Grantor Trust, as the current law stands, accomplishes two goals: allowing the Grantor to gift money out of their estate and pay taxes on the income and gains at the individual’s tax rates (as opposed to the higher trust tax rates).  This essentially created a trust with the best of both worlds—and a highly impactful planning tool.  The proposal would bring these assets back into the estate, effectively eliminating the entire concept. 

PROPOSED CHANGES THAT MAY IMPACT BUSINESSES 

  1. A 3.8% Net Investment Income Tax (NIIT) for S Corporations 

This would apply to “high-income earners”—Modified Adjusted Gross Income (MAGI) for single filers over $400,000; for married filing joint, $500,000.  The proposal creates a new income category called “Specified Net Income” whereby S corporation profits are added to regular investment income—the greater of a person’s net investment income or Specified Net Income would be subject to the 3.8% surtax. 

  1. Cap on QBI deduction 

Once again, for high-income earners, the proposal would cap the maximum amount of the deduction a taxpayer can claim. 

In summary, these changes (and others that I did not cover) may have financial planning implications for individuals, families, and businesses–short and long-term.  I’d encourage you to connect with us to review how the proposed changes may impact you.   

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