Updated 10/26/2021
The Biden administration has proposed a variety of tax changes. Revisions to income taxes are likely to affect many taxpayers. Here’s a summary of the most notable proposals and strategies to consider if they are passed into law.
Proposed Changes
These are some of the major changes if this income tax plan passes into law:
Top income tax rate would increase from 37% to 39.6% and start at lower incomes – $509,300 rather than $628,300 for couples and $452,700 rather than $523,600 for individuals.
A new 3% tax would be established on incomes over $5 million for couples, $2.5 million for individuals, $100,000 for trusts.
Corporate tax rate increases from 21% to 26.5%.
Carried interest would be taxed as ordinary income rather than capital gain – partner’s interest in profits earned by a hedge fund or private equity fund – would be.
Top capital gains rate increases to 25% for taxpayers with income over $450,000 for couples or $400,000 for individuals and would include the 3.8% Affordable Care Act Medicare surtax, resulting in a total rate increase for top earners to 31.8% from the current 23.8%.
3.8% Medicare surtax would apply to all net investment income – passive and active – for taxpayers with adjusted gross income (AGI) over $400,000 rather than only applying to passive net investment income for individuals with AGI above $200,000 and married couples above $250,000.
20% pass-through income tax deduction (199A) would be eliminated for small business owners with income over $500,000 for couples or $400,000 for individuals.
Mega Backdoor Roth 401k contributions would be eliminated in 2022 regardless of income.
Roth IRA conversions would be eliminated starting in 2032.
New excess Required Minimum Distributions would be required from high balance IRAs for incomes of $450,000 joint, $400,000 individual. IRA owners would be required to take 50% of balances over $10 million and 100% of excess over $20 million, starting with Roth assets.
Strategies to Consider
Accelerate taxable income to avoid future taxation at higher proposed rates. Examples can include Roth conversions, capital gain harvesting, accelerating shareholder dividends, exercising non-qualified or incentive stock options, or accelerating gain under 453(d) for installment sales.
Spread out or defer taxable income to remain under proposed new thresholds for higher tax rates. Examples can include doing Roth conversions over multiple years, using 453 installment sales, charitable remainder trusts, 1031 like-kind exchanges, or investing in Opportunity Zones.
Shift taxable income to other family members to remain under proposed new thresholds for higher tax rates. Examples can include using charitable remainder trusts and family limited partnerships.
Avoid taxable income to minimize or avoid exposure to higher proposed tax rates. Examples can include investing in Opportunity Zones, 1202 Qualified Small Business Tax, using Incomplete Gift Non-Grantor Trusts to save state income taxes, or charitable lead trusts.
Carefully time deductions to maximize the resulting tax benefit of the deduction if income tax rates increase or certain limitations are imposed, or caps eliminated. Examples can include deferring business expenses, delaying unrealized capital loss harvesting, or accelerating vs. deferring itemized deductions such as SALT and charitable donations.
These are still proposals, not yet law, but thinking ahead is always a good practice. While reducing taxes is important, we shouldn’t let the tax tail wag the planning dog. But if you find yourself significantly impacted by these proposals, waiting could be costly and you should consider taking action sooner than rather than later.
Sources – CNR, CNR, Lion Street
Grant Monson
CFP®, CLU®, ChFC®
Partner, Financial Advisor
About the Author
Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.
Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.
Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.