 You may have heard about The American Families Plan. It’s a major overhaul to our system in terms of infrastructure and social safety nets. It has been proposed as an “investment in the foundation of middle class prosperity education, health care and child care.” And the proposed price tag is in the trillions of dollars.
Alongside the agenda is proposed tax reform. In many ways, this reform is a reversal of many of the tax giveaways of the 2017 tax law. The hope is that the resulting revenue will pay for the American Families Plan’s investments. The tax proposal will impact certain American Families. It will be raising their tax liabilities through increases in a) income, b) capital gain and c) transfer taxes. This post is the first in a series of three explaining each of those aspects. The piece of the American Families Plan that has garnered most attention is the increase in tax rates of those earning more than $400,000. But these tax policies are very nuanced, and attention to the detail is worth the time and effort. The most startling piece of the bill is the return to the ordinary income tax bracket. It goes back to 39.6% from 37%. And it does so at a significantly reduced income level of $400,000 for single and head of household, and $450,000 for joint filers. The current 37% top ordinary income tax bracket kicked in for married taxpayers filing jointly at $628,300 taxable income in 2021. The proposed bill would impose the top ordinary income tax rate of 39.6% at “just” $450,000 of taxable income in 2022. Similarly, the current 37% ordinary income tax bracket does not begin to impact single filers until they have more than $523,600 in 2021. But in 2022, the top rate of 39.6% would be applied to taxable income more than $400,000 for those same filers. To say it another way, the most impact for single filers with taxable income of over $400,000 and joint filers with taxable income of over $450,000 will be a tax rate increase from 35% to 39.6%. That’s a 4.6% increase on incomes from $400,000 to $523,000. Hitting this group the hardest will be the compression of tax brackets. You might also note that the “marriage penalty” has increased. It allows only $50,000 of joint income over the single taxpayer. In other words, because of the way our tax system and tax brackets work, some married couples who each earn under $400,000 would be subject to a higher tax, as compared to their single counterparts earning the same amount. In this instance, being unmarried and single is better — for tax purposes anyway. Let’s do the math, assume you have a couple (not married) each making $399,999. These taxpayers would not have reached the highest bracket for an unmarried individual. Each individual would be taxed at the 35% bracket. Using this year’s tax bracket for single filers, this results in approximately $132,989 in federal income taxes. (Or, a total of $265,978 combined for both individuals.) If instead this couple decides to marry, they will now have a combined income of $799,998. That puts them in the highest tax bracket (39.6%) as married filing jointly. This translates to an estimated $284,412 in federal income tax, which is $18,434 more in taxes (or about 6.9%) than compared to a situation if they were single. The other option of married filing separately will yield the same result. This will lead to all kinds of new scrutiny for some couples. I expect we’ll see a lot of tax planning around filing status and income threshold management. There will probably be detailed analyses and projections to evaluate the optimal filing status for married couples. They’ll be looking at where certain deductions, tax credits or planning opportunities would be more beneficial if applied to one spouse over the other. In extreme cases, could this factor into one’s marital decision? In my financial planning circles, there’s been a lot of discussion about this, and about divorce. I don’t believe we should be making life decisions around taxes. But the reality is that taxes hit the bottom line, and that impact is real. If you’d like to know more about how to navigate the coming changes with an updated wealth planning strategy, feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question.  Everyone has been on the edge of their seats.
And, after months of anticipation with a “two-track” process of infrastructure and separate tax legislation, it has happened: The American Families Plan is here. And few people saw what was coming. Democrats on the House Ways and Means Committee defied expectations! On September 13, 2021, they released their tax proposals. The legislation touches on a wide range of tax issues:
Over the next few weeks, I’ll be discussing the impact of this legislation on a variety of issues. We’ll be looking at it all with an eye towards what’s most likely to pass. That way, you can consult and anticipate what you might do a) before year end, and b) over the next few years. Right now, let’s look at what did happen and what could be happening. Some of the rumored measures didn’t appear. There are no measures related to equalizing the top ordinary income and capital gains rates. Nor is there anything related to eliminating the step-up in basis. We could be losing several retirement plan strategies for high-income individuals. The compression of tax brackets and increased tax rates are a big deal. But the most highly notable and widely effective piece would be the end of several retirement plan strategies. Most remarkable among these relates to backdoor Roth IRAs and mega backdoor Roth IRA conversions. If enacted, Section 138311 of the proposal would prohibit conversions of after-tax dollars held in retirement accounts. Limiting conversion of after-tax retirement plan contributions to Roth dollars began during the Obama administration. Legislation proposed these conversions be banned. It also proposed adding required minimum distributions (RMDs) to Roth accounts. It proposed eliminating stretch IRA’s, which extend tax-deferred IRA benefits inherited by a non-spouse beneficiary. And, there was a proposal for preventing contributions to retirement accounts with balances over $3.4 million. The Stretch IRA was eliminated in the 2019 SECURE Act. Instead of the original lifetime schedule, beneficiaries must now complete distributions over a 10-year period. With that historical result in mind, it seems like the backdoor Roth is certainly on the chopping block by the end of 2021. The remaining proposals provide some indication of what else could be on the chopping block, given the large ticket Infrastructure Bill going through Congress that requires a “revenue offset” to cover its cost. If enacted, we need to take a fresh look at the convert-or-not decision for savers with after-tax dollars in retirement accounts. The provision is not in its final form, but it looks like it’s going to be enacted. Many investors, particularly IRA owners, have been waiting for the optimal time to make a conversion. But the choice may soon be now or never, at least with respect to the after-tax dollars in their account. And section 138311 goes beyond simply banning the conversion of after-tax amounts. For high-income taxpayers with Adjusted Taxable Income in excess of an applicable threshold, the measure would prohibit Roth conversions altogether. But this won’t happen right away. If it goes into effect, you may have until 2032 for this decision. Nuances and obstacles abound. We’re going to have a lot of strategic examination coming in the very near future. Stay tuned for more analysis of the new regulations and what they’ll mean for your retirement wealth planning. If you’d like to know more about how to navigate the coming changes with an updated wealth planning strategy, feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question. |
Sally J BoyleSally Boyle is committed to being high-net worthy. A certified financial planner, she believes the single most important part of any wealth planning process is her conversation with you. Archives
September 2022
Categories
All
|
RSS Feed