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New Proposed Tax Law Highlights

By now, you’ve likely seen that the House Ways and Means Committee released a draft of major tax legislation.

We parsed through the draft and wanted to provide you with a quick summary of some of the key points of the proposed legislation:

  • Single filers with income below $400,000 and Married Filing Joint filers with income below $450,000 will probably not see 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%. 
      • In a rush to lock in the 20%? Don't be. As it currently stands, the change would apply to investments sold on or after September 13, 2021, meaning that ship has sailed.
  • The 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.  
  • 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. 
    • It would still be over $5 million per person
  • 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 the most people. One additional item worth keeping track of is a 3% surcharge on very, very high-income people (over $5 million per year). But that's also going to apply to trusts with 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.

There are many steps before any proposed legislation becomes law. However, should anyone have any questions or need any tax planning based on these proposed changes, please reach out.

Author: Stephen Cutting, CPA