Contributed by: Josh Bitel, CFP®
Ever since President Joe Biden has taken office, there has been much talk about how the tax landscape may change. On September 13th, Democrats on the House Ways and Means Committee released their new tax proposals. While the outcome may differ from the proposals listed below, we always want to keep you informed on proposed changes. Highlights are summarized below.
New Top Ordinary Income Tax and Capital Gains Rate
Perhaps the most talked about piece of the proposal is the return of the 39.6% income tax bracket. This rate was previously in place from 2013-2017 but reduced to 37% with the Tax Cuts And Jobs Act of 2017. However, this new proposal does not simply replace the 37% bracket with the 39.6%. Instead, it reduces the amount of income a taxpayer can have before being placed in that top bracket. Single taxpayers making over $400,000 or married couples making over $450,000 will be in the new top bracket under this proposal.
Along with ordinary income tax brackets, top capital gains tax brackets may also change. The major difference between this change and the ordinary income tax change is that (if approved) this will go into effect immediately and impact all capital gains from that point forward. In contrast, the ordinary income tax brackets won’t change until 2022. See the chart below for proposed capital gains tax changes.
Proposed Capital Gains Tax Changes
Changes to Roth IRA Strategies
This one may hurt more for advisors. If enacted, this part of the proposal prohibits converting after-tax dollars held in retirement accounts to Roth IRAs. In other words, the “backdoor Roth IRA” and the “Mega backdoor Roth IRA” would be left in the dust.
Another proposed change would go a bit further. In 2032, Roth CONVERSIONS for high-income earners would be prohibited. Any single person earning over $400,000, or married couples earning over $450,000, would be impacted by this rule.
These are just a few of the many changes proposed by Democrats on the House Ways and Means Committee. Of course, the actual bill may look drastically different than the proposals listed in this blog. Planners here at The Center will be sure to stay on top of any changes and keep you informed as they come out.
Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.