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2021 American Families Tax Proposal
Folks with taxable incomes above $400k or couples with more than $450k are looking at paying higher taxes.

Read this Periscope for a summary of the tax proposal to see if the changes affect you. Make sure to share this Periscope with your friends and invite them to contact us if they would like to learn more from an independent fiduciary.

Summary of the Proposed Tax Bill in Congress

The House Ways and Means Committee proposed a tax bill last Monday and sent it to the House floor. If it passes, then it goes to the Senate and the President to sign. We have been spending the past week digesting the changes. They are many. This may be the biggest change to the tax code since 1968.1 Most of the changes I write about in this blog post are for individuals who earn more than $400,000 and married couples who earn more than $450,000 in a year.

The changes that most likely affect a good number of our readers include:
• Back-door Roth conversions may be going away regardless of income
• For individuals over $400k annual income and families over $450k annual income
o Roth conversions may be illegal
o Long-term capital gains taxes may increase
o Income taxes may increase
• Small business S corp owners may pay more in taxes
• Families with estates over $5 million may pay estate taxes
While these proposed shifts are subject to change, you may want to know about them early and then talk to your financial planner! So here is enough info to get you started.

Back-door Roth Conversions may go away for everyone

In recent Periscope blog posts, we discussed “Any Woman’s Roth Contribution.” Otherwise known as “back door” Roth conversions, this financial planning tool was a way for people to add money to a tax-free Roth IRA. You contribute money to an after-tax IRA and then, after time passes, you convert that account to a tax-free Roth IRA. The American Families Plan tax proposal eliminates back door Roth conversions. You have until the end of this year to take action. So read the blog post and/or call your financial planner if you are interested.

Roth conversions may disappear in a decade

The tax proposal eliminates Roth conversions held in retirement accounts, including IRAs and 401ks. This rule affects any individual with more than $400,000 annual income or a couple who has more than $450,000 annual income. The tax proposal allows for 10 years to perform the conversions before they are eliminated in the year 2032. Talk to your financial planner about whether the Roth conversion is something you want to learn more about.

Long-term capital gains tax may increase

Retirement accounts are not affected by increases in the long-term capital gains (LTCG) tax. So an increase in the LTCG tax does not affect any income you receive from your retirement account. However, you may have money invested in accounts other than retirement accounts, and if you do, then you want to know about any proposed capital gains tax increase.
If you make more than $400,000 as an individual or $450,000 as a married couple, then you may face an increase in the tax you pay. Right now, the LTCG tax is capped at 20%. The tax proposal increases this rate to 25%. As many of you who pay these taxes already know, you also pay a 3.8% net investment income tax on top of the 25%. This tax increase is retroactive to September 14, 2021—which means it is too late to change your plans! You will only pay the lower LTCG rate on some sort of a sale that was signed before that day but has yet to close. You may want to talk with your financial planner about what higher capital gains tax means for your financial plan. People affected include those who want to sell investment real estate or a business.
Brackets for the 35% income tax are
• Single: $209,426
• Married Filing Joint: $418,851
LTCG tax 15%
• Single: $40,401
• Married Filing Joint: $80,801

Income taxes may increase

Income taxes for individuals who make more than $400,000 per year and married couples who make more than $450,000 per year may increase. Under the tax proposal, two things happen.
1. The top tax rate is increased to 39.6%
2. You hit the top tax rate sooner; in other words, it takes less income to hit the highest tax bracket
If your family earns significantly more than that, your increase in taxes is not as large as it is for families whose earnings are right around these numbers. In 2021, families with either $400k or $450k taxable income were in a 35% tax bracket. The tax bill for these unlucky families may increase by 4.6% divided by 35%, or 13% higher than 2021. Talk to your financial planner about what this may mean for you.

S corporation taxes may increase

Small business owners often set up an S corporation to save taxes. In the American Families Plan tax proposal, small business owners with income over $400k individual and $500k married filing joint returns will pay more in two kinds of taxes. Not only will they pay the higher income taxes, as above, they will pay a 3.8% surtax. Some small business owners are looking at a top tax rate of 43.4%! This rate is higher than the 39.6% non-business owner income tax rate. If you are in this situation, then you want to talk with your expert team including a CPA, business attorney and your CFP. We would be happy to talk with our expert team about your situation, just ask! We will help you start your financial planning in light of the proposed tax changes!

Families with $5 million may pay estate taxes

Currently, the Federal taxes an estate pays upon death affect a small number of people. Only individuals with estates valued at more than $11.47 million and married couples with estates twice that size currently pay the estate tax.
However, in the American Families Plan tax proposal, the limit drops to $5 million (twice that for a married couple). If you own a business, or own real estate, or are a member of a family who may have assets that exceed $5 million, then you are in the cross-hairs. The estate tax is a 40% tax, payable upon death, from the decedent’s assets. You may want to take action before the end of 2021 to safeguard some of your family’s wealth. Make sure to talk with your CFP and her/his expert team about what is the correct decision for you and your family!

In Conclusion

Talk with your financial planner or set up an initial consultation with a financial planner at AIFS free of charge! Here are related topics you may find interesting:

About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.