Tax Law Change Proposals – Take 2
October 7th, 2021 by Jim Allen
In my June 14th article I discussed several proposed tax law changes that were part of President Biden’s “American Families Plan.” We also conducted a webinar on the proposed laws which you can watch on our website at www.anchorbaycapital.com/moneylife-series-library.
Since then, the House Ways & Means Committee has released the text of the actual bill that was introduced in Congress. The “Build Back Better” bill, introduced on September 13th, is substantially different than what the President had originally proposed. Some of the changes are positive but many will negatively impact a larger group of people than previously suggested. However, almost all the income tax law changes still only affect those making $400,000 or more per year. In addition to the new income tax law changes, there are several gift and estate tax changes that could impact your overall estate plan.
Top Tax Bracket
The original proposal of raising the top tax bracket from 37% back to 39.6% remains with the threshold being $400,000 for single filers and $450,000 for married filers.
Capital Gains
Under the old proposal, capital gains rates on income over $1,000,000 would have been taxed at the top tax bracket instead of the current 20%. Under the Congressional version, the top capital gains bracket will increase from 20% to 25% starting at incomes of $400,000 / $450,000. Unlike the other proposed laws, which would be effective starting January 1, 2022, the capital gains change would apply to capital gains realized on or after September 14th, 2021. So this rule, if enacted, could impact transactions after September 14th of this year.
One positive change from the American Families Plan was the removal of a provision that would have eliminated the “stepped up cost basis” at death. This provision could have negatively impacted many estate plans, and fortunately, has not made into the new bill.
Roth Conversions
The Build Back Better bill would also eliminate a popular tax planning strategy called “backdoor Roth conversions.” A “backdoor” Roth conversion makes use of after tax 401(k) contributions which are then immediately converted to a Roth IRA. The elimination of backdoor Roths was not in the original American Families Plan and would close what Congress felt was a loophole in doing Roth conversions.
Estate and Gift Tax Changes
Under current law, every U.S. citizen has a unified gift and estate tax exemption of $11,700,000 (which is indexed for inflation). For a married couple, this means estate taxes are not an issue unless the estate is larger than $23,400,000. Essentially 99.9% of the U.S. population doesn’t have to worry about estate taxes. This was a result of the Tax Cuts and Jobs Act of 2017 (TCJA) which doubled the previous exemption and is scheduled to expire at the end of 2025. The Build Back Better bill would change the exemption back to the pre TCJA levels in 2022, meaning a $6,000,000 per person exemption in 2022. There are also several proposed changes that would eliminate many of the gift and estate tax planning strategies we use today by closing some tax loopholes.
While a $6,000,000 single person or a $12,000,000 married couple exemption is still very substantial, this change may require a review of your estate plan and a discussion about future gifting strategies to reduce or eliminate the tax. As the status of the Build Back Better bill develops, we will keep you apprised of any potential impacts to your financial plan.
Finally, we wanted to let you know about our next MoneyLife webinar – Setting Your Estate Plan Up for Success. It is being held on Wed. October 27th at 6pm Pacific Time. We will cover all the basics of designing your estate plan as well as possible gifting strategies to use if the estate tax laws do change. You can register on our website at www.anchorbaycapital.com.
Jim Allen, CFP, ChFC, EA, CDFA is President, Sr. Advisor and a Principal at Anchor Bay Capital. In addition to his 30+ years of financial planning experience and his professional credentials, he holds a Master’s Degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.” Jim can be reached at [email protected]