New “American Families Plan” Tax Proposal
Look what we learned after reading the proposed tax changes.
We are trying to condense the 200+ page tax proposal into the top talking points we will be discussing with clients. More importantly, these are still proposed tax changes at the time of writing, so there will likely be updates.
Income Tax Rate Changes
Back Door Roth Conversions
Estate and Gift Tax Changes
Capital Gains Tax Changes
For starters, changes to the federal income tax brackets are being condensed. If you are single and making over $400,000 or married and making over $450,000 you are being welcomed into the highest tax bracket of 39.6%.
One of our tax planning strategies for clients, the back door Roth conversion, is up for elimination. This would disallow anyone from converting after-tax dollars to a Roth IRA. Greater oversight is expected for all retirement plan balances over $10,000,000.
In 2020, the exemption was $11.58 million per individual, or $23.16 million per married couple. For 2021, an inflation adjustment lifted that $10mm balance to $11.7 million per individual and $23.4 million per couple. Under the proposed changes, this exemption would likely be cut in half.
The reduced tax rates for long term capital gains have been a great benefit for long-term investors. Long-term capital gains or losses apply to the sale of an investment made after owning it 12 months or longer. For the past ~20 years, the highest tax rate for these have been 20%. The proposed tax change will increase this tax rate up to 25%.
This summary of changes is only a glimpse of the coming tax changes, but these four highlights are some of the most applicable to retirement savings. As we get closer to the new year and these proposed changes are enacted, we will be reviewing closely to make adjustments in our planning and advice.