Taxes can burden your financial and retirement plans; it is important that you work with your trusted advisors to evaluate how the recently proposed changes could impact you specifically.

Here are the basics of the American Family Tax Plan, currently under consideration (as of 10/14/21) to help pay for social policy and government infrastructure initiatives:

 

An increase in the top ordinary income tax rate – from 37% to 39.6% effective 2022. The income level that triggers this top rate notably decreases from $628,300 to $450,000 for joint filers and from $523,600 to $400,000 for Individual filers. The reduced income level will eliminate the 37% bracket. This greatly impacts single and joint files over $400,000 and $450,000 income thresholds respectively – these taxpayers will see a 4.6% increase from their current 35% rate to the proposed 39.6% rate.

Increase of the top long-term capital gains rate from 20% to 25%. This proposed rate increase could go into effect immediately, impacting long-term gains on or after September 14th, 2021. Again, the proposal impacts those earning more $400,000 (single filers) and $450,000 (joint filers) who will be subject to 25% long-term capital gains rate.

A 3% surcharge on household modified adjusted gross income in-excess of $5 million per year or $2.5 million if you are single/married filing separately. The surcharge also applies to trusts and estates at a much lower threshold of $100,000.

3.8% net investment income tax, specifically on pass through active income, if your modified adjusted gross income exceeds the $400,000 (S) and $500,000 (MFJ) thresholds.

Individuals earning more than $400,000 annually ($450,000 MFJ) with retirement or 401(k) accounts more than $10 million dollars are prohibited from making additional contributions. These same investors would also be subject to an accelerated required minimum distribution (RMD) schedule on their IRA assets above $10 million dollars. Individuals with retirement assets above $10 million would have to distribute 50% of assets above $10 million and 100% of assets above $20 million.

Legislation prohibits all taxpayers, regardless of income, from converting after-tax contributions held in IRAs and/or employee sponsored plans to ROTH effective 2022. This change eliminates the “back door” ROTH IRA strategy entirely. Further, the bill eliminates both IRA and employee sponsored plan ROTH conversions effective January 1, 2032 for high income earners defined as adjusted taxable income above $400,000 (single) and $450,000 (joint). This allows a 10-year window for high income earners to convert traditional retirement assets to a Roth IRA.

Wash sale rules could now include cryptocurrency, foreign securities, and commodities. Further, transactions that include “buy backs” on the part of spouses, independents, tax favored accounts (IRA, 401K) and other controlled entities (partnership, estate) are also considered a wash sale.

The Estate and Gift tax exemption will nearly be cut in half from the current level of $11,700,000/couple ($5,850,000/single) – the exemption will adjust for inflation each year.

The proposed bill would add new provisions to Irrevocable Grantor Trusts which the Grantor is considered the owner for income tax purposes. Trusts that are currently in place will only be affected if they have future contributions.

 

Your investment advisor, accountant and attorney are great resources who already have a firm grasp on your unique circumstances. They can each offer valuable insights to help you navigate the complexities of the proposed bill while acknowledging it may not withstand the legislative process.

While not an exhaustive list, potential discussion points to help facilitate your conversations include:

• Pulling income forward into 2021 with proposed income bracket compression & higher rates next year, talk to your accountant.
• Capital gain realization will stay at 15% if you are under the $400,000 (s) and $450,000 (mfj) limits, make sure you have a clear capital gains budget set, annually, with your investment manager.
• Additional tax liability if you are an S-Corp owner, talk with your accountant to better understand.
• 10+ million in an IRA? Ask your accountant, financial planner, and investment manager about Required Minimum Distribution changes.
• Review ROTH conversion & contribution availability with your accountant and financial planner.
• Both estate tax changes and grantor trust changes are worth a conversation with your estate planning attorney and financial planner who can guide you on various options.
• Timing of sale of property or business that could be hit with the 3% surcharge effective next year, understand if you will be impacted – your accountant is a good place to start.

Keep in mind, the proposed legislation hits on a wide range of tax issues but falls silent on several rumored topics. You may need to pivot once the tax policies are finalized. Collaborating now with trusted professionals will empower you to make better decisions with your specific needs in mind.

There are many unknowns, still, we encourage you to take control. The first step is to contact your Bahl & Gaynor Portfolio Manager with any questions you may have.

 

Disclosure:
Investment advisory services provided through Bahl & Gaynor Investment Counsel (“B&G”), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration does not imply Information or a certain level of skill or training. More information about B&G can be found by visiting www.adviserinfo.sec.gov and searching by the adviser’s name. This is prepared for informational purposes only and may not be applicable to your particular situation or need(s). It does not address specific investment objectives. Information in these materials is from sources B&G deems reliable, however we do not attest to its accuracy. Past performance is not indicative of future results. Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not guaranteed by B&G. No fiduciary relationship exists because of this commentary. If you have any questions regarding the indices or investments referenced in this presentation, contact your B&G investment professional. This is not considered tax advice. Please consult your tax advisor with any tax questions.