On September 13th the house ways and means committee released their new tax proposal. Read on to learn about 5 important changes!
- New Tax Brackets!
The new bill titled “The American Families Plan” would change the current tax brackets as shown below.
| Single | Married Filing Jointly | |||
| Current | Proposed | Current | Proposed | |
| 10% | $0 – $9,950 | $0 – $9,950 | $0 – $19,900 | $0 – $19,900 |
| 12% | $9,951 – $40,525 | $9,951 – $40,525 | $19,901 – $81,050 | $19,901 – $81,050 |
| 22% | $40,526 – $86,375 | $40,526 – $86,375 | $81,051 – $172,750 | $81,051 – $172,750 |
| 24% | $86,376 – $164,925 | $86,376 – $164,925 | $172,751 – $329,850 | $172,751 – $329,850 |
| 32% | $164,926 – $209,425 | $164,926 – $209,425 | $329,851 – $418,850 | $329,851 – $418,850 |
| 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+ | ||
Important to note is that the brackets remain unchanged until income exceeds $400k/$450k for single and joint filers respectively. Also, worth noting is the increase in the top marginal tax rate from 37% to 39.6% as well as much lower income limits before filers cross into the top marginal bracket! This change, if passed, would take effect beginning in 2022.
- New Long Term Capital Gains Rates
There would also be new, and increased, long term capital gains taxes for high income earners as shown below.
| Single | Married Filing Jointly | |||
| Current | Proposed | Current | Proposed | |
| 0% | $0 – $40,400 | $0 – $40,400 | $0 – 80,800 | $0 – 80,800 |
| 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+ | ||
Note here that high income earners will see increased long term capital gains rates from the current 20% to 25% once income crosses over into the top marginal tax bracket. Interestingly, this change would not be as dramatic as the previously discussed capital gains increases which would have taxed all capital gains at ordinary income rates once a filers income reached $1,000,000/year. Additionally, this increased rate would take effect immediately and would impact long term gains incurred this year after the bill’s passing.
- New Rules Surrounding Roth Conversions
The prohibition of Roth conversions on after-tax dollars held in retirement accounts for high income earners ($400k Single/$450k joint) would go into effect beginning in 2022. This would eliminate the “mega backdoor Roth IRA” strategy moving forward. In addition, the bill would prohibit any Roth conversion for high income earners starting in 2032. Interesting to note the bill provides 10 years before the Roth conversions are eliminated for high income filers, most likely to accelerate conversions now which would increase tax revenue in the short term.
- New RMD Rules
There are new RMD rules that will apply to people who have both high income AND very large retirement accounts. If a filer has both they will be required to make mandatory required minimum distributions, regardless of age, effective in 2022. Specifically, if an individual has income above $400k (single) or $450k (joint) and total retirement accounts greater than $10,000,000 they will be subject to RMDs that year. For individuals with retirement accounts that are between $10,000,000 and $20,000,000 the RMD will be equal to 50% of the amount over $10,000,000. For example, if you have retirement accounts that total $15,000,000 and your income is above the limits mentioned above, you’ll be required to distribute $2,500,000 in 2022! That’s quite a bit of new taxable income! As a side note, there are also rules for filers who have retirement accounts valued at more than $20,000,000 which are a bit more nuanced and outside the scope of this post.
- Reduced Unified Credit Amount for Estate and Gift Taxes
The Tax Cuts and Jobs Act of passed in 2017 doubled this credit amount from roughly $5,000,000 to $10,000,000 and was scheduled to sunset in 2025. The American Families Plan would accelerate that forward to 2022. If passed the Unified Credit Amount would reduce to $5,000,000 adjusted for inflation (expected to be roughly $6,000,000 for 2022). This has serious planning implications for people with estates that would have been fully covered by the larger credit and now find themselves exposed to federal estate taxes (which can be as high as 40%!)
While there are some major changes included in this draft it’s important to remember that this is not the final version of the bill. There could be dramatic changes as negotiations take place between both sides of the aisle and it wouldn’t be surprising to see some details change dramatically before we have a final version. If you have any questions about the proposals included in the bill and how it may affect you don’t hesitate to reach out to us – we’re always here to help!
Your team at iNNOVA Wealth Partners
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