As you may know, the House Ways and Means Committee released a draft of major tax legislation on September 13th. While it significantly scales back increases in previous proposals, it does add new ones.
The provisions will most likely change before the final bill passes, however we are providing a quick summary of key points of the proposed legislation as of today. Please note, this is not an exhaustive list, instead our aim is to add clarity to issues that may impact you.
Proposed Income Tax Changes
- Single filers with income below $400,000 and Married Filing Joint (MFJ) filers with income below $450,000 will probably not see any significant impact right away.
- Taxpayers with income over these thresholds should expect higher marginal rates and higher capital gains rates.
- The bill brings back the top marginal tax rate of 39.6% on ordinary income while compressing the existing 32% and 35% brackets (the top bracket under current law is 37%).
- For taxpayers over the $400,000/$450,000 thresholds, capital gains would increase from 20% to 25%.
- With the 3.8% levy for the Affordable Care Act, the new top capital gains rate would effectively be 28.8%, well below the 43.4% from earlier proposals. The new rate would go into effect retroactively to September 13th.
- For high-income taxpayers with modified AGI (MAGI) exceeding $5 million, a 3% surcharge will apply on all income. This additional 3% surcharge is in addition to the 3.8% Net Investment Income Tax that would remain in place under the proposed law.
Proposed Retirement Strategy Changes
- The strategy of making non-deductible IRA contributions and then converting them to a Roth IRA, or the “backdoor Roth”, appears to be on its way out starting in 2022.
- The proposal will also prevent savers from using the “mega backdoor Roth” strategy within 401k plans.
- Elimination of Roth conversions for Single filer taxpayers with taxable income over $400,000 and Married Filing Joint filers with taxable income over $450,000 beginning in 2032 (would not be effective for 10 years).
Proposed Tax Credit and Tax Exemption Changes
- Increases to both the Child Tax Credit and the Child and Dependent Care Credits.
- The gift and estate tax exemption amount reduction previously scheduled for 2026 would be accelerated and beginning in 2022 will decrease from $11.7 million to $6 million per person, adjusted for inflation.
Proposed Business Income Tax Changes
- Application of the 3.8% Net Investment Income Tax (NIIT) to S-Corp and other active business entity pass through distributions for taxpayers with income higher than $400,000 (Individual) or $500,000 (Married Filing Jointly).
- Limitations of the QBI Deduction (199A deduction) for high income taxpayers
We will continue to closely monitor this legislation as it works its way through Congress and provide updates. If and when the bill is passed, we do not expect any of the tax changes to be retroactive and apply to the 2021 tax year, with the exception of the new top capital gains rate which would go into effect September 13th.
Please do not hesitate to reach out to your RTD team!