Are You Prepared for the Proposed Tax Law Changes?
Are you prepared for potential massive changes to U.S. tax laws?
President Joseph Biden and the U.S. Congress have been working for months on the Build Back Better infrastructure plan. The $1.7 trillion plan calls for massive spending on social spending and climate change.
However, to pay for those investments, the act also calls for nearly $2 trillion in offsets much of it in new taxes, especially for high-income earners.
As of this writing, the act was still making its way through Congress. While the specifics may change before passage, it’s likely that some changes to tax laws are inevitable.
Will the Changes Affect You?
The tax changes will affect a smaller group of taxpayers than in earlier versions of the plan. Nonetheless, the most likely group of affected taxpayers will include those with:
Adjusted gross income equal to or in excess of $400,000
A modified adjusted gross income in excess of $10 million
IRAs or workplace retirement plans with balances exceeding $10 million
Itemize deductions on a federal tax return
Ownership of a limited partnership or S corporation
Current or planned trusts
The current law calls for the highest tax rate – 37 percent applied to income rates as follows:
$314,500 for married couples filing separately
$523,600 for individuals or those filing as head of household
$628,300 for married couples filing a joint return
The new laws call for an increase in the marginal tax rate to 39.6 percent for those with taxable includes of more than $400,000 or $450,000 for those filing jointly.
The rate would go into effect in 2022 and change portions of the 2017 tax laws. In 2026, the projected top tax rate would be 39.6 percent for those with taxable income greater than $501,250.
Under the new laws, taxpayers with a modified adjusted gross income (MAGI) of more than $10 million ($5 million for individuals filing separately) would be assessed a 5 percent surcharge to income above those levels. For incomes in excess of $25 million ($12.5 million if filing a separate return), an additional 3 percent surcharge would be added, for a total surcharge of 8 percent. The surcharges would also take effect in 2022.
Long-Term Capital Gains and Qualified Dividends
The proposed laws would increase the long-term capital gains tax, end the loophole for carried interest, and end tax-free exchanges.
The most likely affected individuals would be those with more than $1 million in income, hedge fund managers with carried interest, and real estate investors with more than $500,000 in capital gains.
Currently, the maximum tax rate on long-term capital gains is 23.8 percent on the sale of assets held for more than 12 months. Under the proposed law, that rate would almost double to 43.4 percent on gains for taxpayers with more than $1 million in annual income.
The new law would also lower to $500,000 in gains eligible for the tax-free real estate changes called 1031 Exchanges.
For people looking to sell a major asset, such as a home, investment, or business, completing the sale in 2021 is a prudent move. You’ll also want to evaluate any future sales to determine if the tax savings would make it advantageous to see this year.
In the future, if the bill passes, you’ll want to consider strategies that spread out the income over multiple years, such as charitable remainder trusts or installment sales.
Estate Tax Exemption and Estate Tax Rate
Current law allows for trusts to shelter income from current taxation. Individuals can also exempt up to $11.7 million in combined lifetime gifts and estate value from any estate tax.
The new law would put a 5 percent surtax on adjusted gross income of a non-grantor trust that generates more than $200,000 in income per year. An additional surtax of 5 percent (for a total of 8 percent) would apply to trusts with income more than $500,000.
Earlier versions of the Build Back Better Act accelerated the expiration date of the $11.7 million exemption, currently slated for 2025, to a level of about half that amount. However, those proposals are not a part of the current plan.
It is prudent to review your estate plan to determine what impact these changes may have on your heirs.
Changes to IRAs
The proposed law would affect those with aggregate balances of $10 million or more in retirement accounts. Those individuals would be prohibited from making additional IRA contributions if their income exceeds $400,000 (single taxpayers), $450,000 (married filing jointly, or $425,000 (head of household).
Changes would also be made to the minimum required distributions for those with more than $10 million at the close of the prior tax year.
At Solas Wealth, we help individuals and families maximize their returns, plan for the future and make smart investment choices. Speak to one of our trusted financial advisors today to help you plan for the coming tax changes and keep your money protected.