Tax Increases

Susan Jung |

I continue to talk about a potential economic slowdown next year as my main justification that the Federal Reserve will not raise rates quickly. Economic growth will likely be impacted by tax increases that are currently proposed. While not all of these proposals will pass, they are on the table for discussion; there is little doubt there will be tax increases.
A recent Forbes article outlined some of the proposals. These are all tentative ideas at this point, and we shall see what final legislation looks like. See quote below.
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"The House Ways & Means Committee has released draft legislation of individual tax hikes they propose to pay for the $3.5 trillion social policy budget plan under consideration. It includes major revisions to the estate tax, capital gains taxes and the way retirement accounts are taxed. The top capital gains tax rate would be 25%. The estate tax would revert to pre-Trump levels. Roth IRA conversions, including backdoor Roth IRAs, would be prohibited for high earners.

Who’s rich for purposes of this legislation? In most cases, it’s a married couple with income over $450,000, singles with income over $400,000. But beneficiaries of trusts and estates (that can be a special needs child) would also feel the pain as trusts and estates would face the new top income tax rate of 39.6% at just $12,500 of income. After-tax contributions to workplace retirement plans would be prohibited, no matter your income level. 

Here’s what in play for now relating to income taxes.

There’s increasing the top individual rate to 39.6%, from 37% for married couples earning over $450,000 and singles earning over $400,000.

There’s increasing the top capital gain rate to 25%, up from 20% for “certain high income individuals.” This would be effective as of today, Monday, September 13. There’s a transition rule that could help some taxpayers.

There’s expanding the net investment income tax (that’s imposed on married folks who earn more than $250,000 and singles who earn more than $200,000) to capture additional income from passive businesses.

There’s changing the 199a qualified business income deduction limitation to include all income over $500,000 for married couples, or $400,000 for singles. That means there would be no 199a deduction if you earn over those thresholds.

There’s a new individual income surtax that would impose a 3% surtax on individuals with adjusted gross income over $5 million.

Here’s what’s in play for now relating to estate taxes.

The estate and gift tax exemptions would drop back to $5 million (plus inflation adjustments), down from the current $11.7 million per person. The effective date of the lower exemption would be for gifts and deaths after December 31, 2021.

One proposed change is favorable for farmers and family businesses: They would get a special valuation reduction of $11.7 million for qualified real property used in the farm or business (a backhand way of keeping the higher estate tax exemption amount for these folks).

Here’s what’s in play for now relating to retirement accounts.

There would be new contribution limits, essentially prohibiting new retirement account contributions for taxpayers whose aggregate retirement account balance exceeded $10 million in the prior tax year. It would apply to married couples with taxable income over $450,000 (over $400,000 for singles). 

These same folks would have to take a special minimum withdrawal (50% of the amount over $10 million) from their retirement account in the year following any year the balance exceeded $10 million. There are more complicated rules for those whose accounts exceed $20 million.

The proposal takes aim at more wealth building strategies, eliminating Roth conversions for IRAs and workplace plans for married couple earning over $450,000 (singles over $400,000). This provision wouldn’t be effective until after tax year December 31, 2031.

The same section of the proposal prohibits all employee after-tax contributions in workplace plans, and it prohibits converting after-tax contributions to Roth status, regardless of income level. 

The proposal also has rules to fight self-dealing, prohibiting investing IRA assets in entities in which the owner has a substantial interest. It clarifies that these rules would apply to inherited IRAs too. The Internal Revenue Service would be given three more years—six instead of three—to pursue violations related to valuation misreporting and prohibited transactions."

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