Plum Street’s observations on the tax reform proposals in Congress – September 16, 2021

President Biden campaigned on increasing taxes on people earning over $400,000 per year. In June, his administration proposed significant changes to the U.S. tax code in a document called the “Green Book”. Now in September, we are finally able to see details on the tax proposal from House Democrats.

The House Democrat’s tax reforms are largely in line with the spirit, if not all the details, of President Biden’s proposals. Final rules will likely differ from this proposal, but the following summary outlines the most significant changes by income and wealth level in the current draft tax plan:

Few changes for Americans with taxable income less than $450,000 (joint filers)/$400,000 (single filers)

  • No changes in income tax rates
  • No changes in capital gains for those currently paying the 15% rate (income less than $501,600 for joint filers/$445,850 for single filers in 2021)
  • A proposed extension of the child tax credit through 2025 might reduce taxes for many families at this level (child credit phases out for joint filers with over $400,000 and single filers with over $200,000 in taxable income)

Modest changes from Americans with taxable income greater than $450,000 (joint filers)/$400,000 (single filers)

  • An increase in the top tax bracket back to 39.6% (was lowered to 37% in the Tax Act of 2017)
  • Capital gains tax increase to 25% for those currently paying 20% rate (income over $501,600 for joint filers/$445,850 for single filers in 2021)

Significant changes for Americans with taxable income greater than $5 million, or with large estates

  • The changes shown in the section above, plus
  • 3% income tax surcharge on taxable income over $5 million
  • Dialing back the estate tax exemption to likely approximately $6 million per individual ($12 million per couple) in 2022, rather than current law which sunsets today’s higher exemptions after 2025

In addition, the current proposal contemplates significant changes to so-called “back-door” Roth conversions as well as to employee after-tax contributions and Roth conversions in work retirement plans, which we’ll be tracking as the proposal moves forward.

The Democrat’s proposal is just another step, and final rules are still evolving. We will keep a close eye on the emerging legislation and will provide updates as major changes become known. We are available to discuss more specifically how the new rules might impact you, and the best strategies for your portfolios. As always, please do not hesitate to reach out at any time.