Proposed Tax Changes – How It Could Potentially Affect You

By Dan Miller, CFP®

This past year has brought up a lot of questions about how tax policy could potentially be changing and what potential effects it could have on each of us.

So, let’s start by asking the question a lot of people are thinking – Will I be paying more in taxes next year?

This question can be asked in another way – Are taxes really only going to rise for the wealthiest of taxpayers?

Right now, nothing is set in stone. However, if the current proposed tax changes are enacted into law, someone is going to see a tax increase. Is that you and me? Or will only the "wealthy" (whoever that is by definition) likely see a rise in their taxes?

Congress is currently debating two action items on Biden's “Build Back Better” agenda: The American Jobs Plan (which includes corporate tax increases) and the American Families Plan (which includes individual tax increases).¹ Neither of which plan name seems to really fit with what they contain in the bills.

Neither plan looks close to passing in its current form, so nothing is set in stone yet.

But the provisions below offer a current blueprint (as of the date of this writing) for what could happen.

The House is negotiating a package of tax increases that would pay for expanding Medicare, free community college and prekindergarten, and increase the federal safety net.²

If the plan passes as-is, it would:

To remind everyone, these tax proposals are not law but are in Congress. The Senate may also have their own set of proposals, which would require both bodies to come to a compromise before the tax bill goes to Biden’s desk.

How likely are all these measures to pass?

Here's where we start speculating. To pass the American Families Plan using budget reconciliation, Biden needs the votes from his entire party. Progressives are committed to passing the full deal, but centrists and moderates are balking at the price tag.¹ To get through the Senate, it seems like both sides will need to meet somewhere in the middle.

A lower final cost to the bill would require less revenue to cover and might allow some of the tax increases to be eliminated. Since the IRS has been targeting Roth conversions and large IRAs, it is possible that those measures may pass in the final version.

When could the new laws go into effect?

It seems likely that most provisions would be effective on January 1, 2022 and apply going forward (not retroactively). However, separate deadlines could be negotiated for certain provisions.

It is understandable that the uncertainty of these proposed changes can make some people uneasy and rightfully so. Which is also why planning for some of these changes can reduce the chances of an unwanted surprise.

Here are some general guidelines. Everyone’s situation is unique, so if you have any specific questions, please reach out to us and/or your trusted tax advisor.

If the increase in the top tax rate and proposed surcharge on income over $5 million are enacted:

A couple with taxable income of $600,000 filing jointly will have their tax rate rise from 35% to 39.6%, meaning $6,900 increase in taxes on $150,000 of income compared to the current tax brackets.

There are strategies to help minimize the hit you may take from extra taxes next year, however. For example, you might consider shifting 2022 income forward to the 2021 tax year and look for ways to defer expenses and deductions to 2022 that you would usually take in 2021.

Charitable contributions and maximizing contributions to tax-deferred savings may also reduce your taxable income for the year.

If a higher marginal tax rate goes through, municipal bonds may also become more popular because they are exempt from federal income tax.

Also, for individuals earning over $5 million; they could now be pushed to a top tax rate of 42.6%. They would now be subject to a new proposed 3% surcharge. Please note – this is different from and in addition to today’s current 3.85% tax on net investment income.

If rates rise on dividends and long-term capital gains tax rates:

If passed in its current form; Individuals earning more than $400,000 or couples earning over $450,000 will pay a top rate of 25% if a capital gain is realized on or after September 14, 2021. This would apply to dividends, as well.

To combat this, you may want to consider deferring gains because an unrealized capital gain would not be subject to taxes.

If RMD requirements change for individuals who have high income and large retirement accounts:

You will be subject to new RMD requirements beginning in 2022 if you meet these requirements:

Income exceeds $400,000 and $450,000 for single and joint filers, respectively
AND retirement accounts are over $10 million you will have to take an RMD -
REGARDLESS of age

If you meet this criteria, you also will not be allowed to make IRA contributions! But it is important to point out that it would not apply to employer sponsored plans.

If new limits on QBI deductions for individually owned businesses go through:

House proposal limits the deduction to $500,000 if you are self-employed for joint returns and $400,000 for individuals. Any additional amount will be disregarded.

Bottom line: The laws may change. If so, we will adapt.

Here are the usual caveats: We don’t know what the final bills will look like and when (or if) they will pass. Taxes are just one part of your overall picture. New laws usually contain a mix of positive and negative changes for you, me, and everyone else. The long-term impact of the positives and the negatives won't be visible for some time.

If you have any specific questions regarding how these, or any future potential changes may directly affect your situation: reach out our team at Miller Financial Group, Inc. and/or your own legal and tax professional.

The information expressed herein is obtained from sources that are believed to be credible, however, their accuracy cannot be guaranteed. All data is created from publicly available information and has not been independently verified by USA Financial.

SOURCES:

Dan Miller, Kaleb Robuck and Marcus Taylor are investment adviser representatives of, and securities and advisory services are offered through, USA Financial Securities Corp. Member FINRA/SIPC. A Registered Investment Advisor located at 6020 E Fulton St., Ada, MI 49301. Miller Financial Group is not affiliated with USA Financial Securities. Miller Financial Group, Inc. does not provide tax or legal advice. Please consult your own tax or legal professionals for guidance.

If the plan passes as-is, it would:

How likely are all these measures to pass?

When could the new laws go into effect?

Bottom line: The laws may change. If so, we will adapt.

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