Perspective | Vol. 1 Issue 1 | Fall 2021

As you know, at Spectrum, we believe knowledge is power. To provide clarity and ensure that you are better informed about the House Ways and Means Committee’s most recent tax proposal, we have outlined the tax changes that may potentially impact our clients’ financial planning in the future. Corporations The top corporate tax rate would increase from 21% to 26.5% (raises $540billion) Individual Taxpayers Income tax bracket rate increases (raises $170billion) Increases the top rate from 37% to 39.6% in 2022 for individuals with a taxable income of $400,000 and $450,000 for married couples that file taxes jointly. The proposal brings back the “marriage penalty.” - Trusts & estates with incomes over $12,500 will be subjected to the 39.6% bracket. - Effective date: January 1, 2022 Long-Term Capital Gains rate increases (raises $123billion) Changes the 20% current top rate to 25% for capital gains and qualified dividends - The effective date for 2021: Long-Term Capital Gains recognized after September 13, 2021. Long-Term Capital Gains recognized on or before that date will be netted with losses recognized on or before that date and remain subject to the 20% top rate. - Additionally, the 20% top rate will continue to apply if the gain results from a transaction entered into on or before September 13 and is not materially modified. Expands the Net Investment Income Tax (raises $252billion) To capture more income to cover net income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer). By closing this gap, all income, be it from wages (currently subject to 3.8% HI tax), investments

(currently subject to 3.8% net investment income tax), or earnings from passthrough businesses, will be subject to the same amount of tax, for those with higher incomes. Roth IRA (raises $4billion) Roth conversions would be limited to those individual taxpayers with less than $400,000 of income and taxpayers that are married filing jointly with less than $450,000 of income. After-tax contributions made to a Traditional IRA or 401(k) would no longer be eligible for conversion to a Roth IRA. Many high-net-worth clients that are not eligible for a Roth contribution utilize this technique, commonly referred to as a “backdoor Roth IRA” to fund a Roth IRA. Additional restrictions would be included for individuals with retirement account balances exceeding $10,000,000 and income exceeding the Roth conversion limits outlined above. No additional contributions could be made to IRAs. Additionally, a distribution of 50% of the amount by which their retirement account balance exceeds $10,000,000 must be taken each year. - If retirement account balances exceed $20,000,000 and an individual has a Roth IRA or Roth Retirement Plan, the individual must also take a distribution from their Roth account balance to bring the account balance below $20,000,000. The effective date for the changes proposed above would be for tax years beginning after December 31, 2021. Estate Taxes Reverses the 2017 Tax Act increases made to gift, estate, and generation-skipping transfer (GST) tax exemptions effective as of January 1, 2022 (raises $50billion). For 2021, the exemptions remain at $11,700,000.


Taxes, What We Know for Now – Summary of the September 2021 House Ways and Means Committee Tax Proposal

Bob Phillips CPA, CFP ® , CFA ® President Co-Founder

In early September, House Democrats laid out their draft of proposed tax changes for legislation to implement in the 2021 – 2022 federal budget. Some of the changes have been discussed heavily in the past as part of President Biden's foundation to fund the "American Families Plan." Yet, several prospective tax changes were recently added to the House Ways and Means Committee proposal that could reduce current wealth and estate planning options.

The proposed tax increases targets corporations, high-income business owners, estate taxes, individual income taxes for high earners, long-term capital gains, and Roth IRAs. These increases are being pushed in hopes of expanding civil aid available to Americans and work towards combat ing climate change. This includes, but is not limited to, generating more than $2 trillion to go toward expanding Medicare benefits, supporting investment in and deployment of clean energy, investing in tax fairness by increasing the size and efficiency of the Internal Revenue Service (IRS), and lowering prescription costs by allowing the HHS Secretary to negotiate for lower drug prices. 1



Made with FlippingBook - professional solution for displaying marketing and sales documents online