Change is all around us and has certainly been kicked into overdrive during the past year or so. There’s so much to stay on top of and in my industry, conferences have been an excellent place to take it all in. The conferences are virtual, of course, but are still a great way to hear from a variety of experts all in one place (so to speak) about the economy, the markets, taxes, and various other topics related to financial planning.
I spent the better part of last week at one of these virtual conferences. There was a lot of investment-related stuff that I won’t bore you with, but I will share other information with you today about expected changes to tax policy.
Late last month the Biden administration proposed the American Families Plan, a major tax overhaul reversing much of the last major overhaul from just a few years ago. There’s sort of a washing machine feeling that comes with these lurches in tax policy but deal with it we must.
I’m going to present this information in bullet format to try and replicate my notes from a couple of the sessions last week. There’s a lot to the tax plan and much is subject to change as it works through Congress. (That old saying, “the President proposes, Congress disposes” comes to mind.) Still, the thrust of the plan is what’s important and, with Democrats in control of the government, most of these proposals will likely be implemented even if the numbers end up a little different.
- It’s assumed that the new tax laws will take affect in 2022 and won’t be retroactive for this year. Hopefully Congress doesn’t wait until late in the year as they did with the Tax Cuts and Jobs Act, and the SECURE Act (both passed in late December 2017 and 2019, respectively). Doing so makes planning difficult.
- There’s a line being drawn in the sand at $400,000 of annual income. Those above are likely to pay substantially higher tax rates than those below. If you know, or at least expect, to be around that income number you should pay close attention to the news around these proposals. You may end up trying to pull income forward into this year and delaying expenses into next, if possible.
- Again, those well below this supposed threshold shouldn’t see their taxes go up. The opposite should be the case, at least on average.
- Higher earners could see a host of other changes, including itemized deductions getting capped at 28% and losing the Qualified Business Interest deduction for those with small businesses.
- Retirement account savings methodology could be flipped on it’s head. We could see deductibility capped on contributions to IRAs and 401k plans for higher earners while lower earners could receive a refundable credit. Essentially, this would take deductibility from higher earners and give it to lower earners to allow them to save more toward retirement (a so-called Robinhood provision. The man in tights, not the brokerage firm). This could make Roth IRAs and Roth 401k plans more appealing to higher earners and traditional IRAs more attractive to lower earners – a reversal of current thinking.
- The so-called SALT provision that caps deductibility of state and local taxes could go away. This isn’t in the Biden plan but is thought to have to be included to get support from coastal democrats.
- Capital gains, real estate exchanges, and the so-called step-up in basis could have a $1 million income threshold. Those with income (which includes the value of asset sales) over the threshold would pay higher rates, be unable to do exchanges, and even lose their basis step-up. All of this would lead to more capital gains taxes being paid by higher earners.
- As a reminder, your tax status is generally looked at one year at a time. You could have a more “normal” income situation followed by a surge of income from a business sale or maybe a taxable inheritance. This could bump you up beyond these thresholds for one year and you get hammered by taxes, only to go back to normal the next year.
- The ramifications of this last bullet are interesting in states like CA where folks often have a lot of home equity. Under the proposed plan it’s possible that death triggers a “sale” for tax purposes above this $1mil income threshold. The step-up in basis would go away and the larger gain becomes taxable for higher earners who inherit family property, for example.
- Also along these lines, the so-called death tax limit could be reduced to $3.5 million but could be as high as $6.5 million. Nobody I heard from thought it would be anywhere close to the current $11+ million level.
These and other proposals are now subject to the vagaries of our duly elected officials in D.C. The main point of this post is that, even with everything else going on in the world right now, major tax changes are being planned yet again. If you’re anywhere near the thresholds currently being talking about, you should pay close attention to how this plays out.
Also, I think this should be obvious, but I’ll say it anyway: none of the above should be taken as specific tax advice. I’m not a CPA and don’t even play one on TV. I am enhancing my services in the tax planning area, however, in part because of this latest round of proposed tax changes. More on that in the coming weeks.
Here are two links to read more about the proposals.
Have questions? Ask me. I can help.
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