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Proposed Bill Includes Tax Increases for High Earners, Retirement Account Changes

Proposed Bill Includes Tax Increases for High Earners, Retirement Account Changes

Earlier in September 2021, Democrats in the House Ways and Means Committee informed the public of a proposed tax plan that would affect corporate and personal taxes, as well as retirement plans.

The proposed tax plan is a part of a $3.5 trillion domestic investment plan with many of the changes designed to help pay for that plan. Although these changes are merely proposals, it’s still important to understand what this would mean for every American.

Income Tax

From 37%, the highest personal income tax bracket will increase to 39.6%. This change will have a more significant impact on married couples than individual filters — married couples filing jointly will pay at least $450,000 while single filers will pay $400,000.

Additionally, the proposed tax plan adds a 3% increase in surtax on individuals with a gross income of more than $5 million.

Capital Gains Tax

Capital gains and dividends tax would increase from 20% to 25% under the proposed tax plan and have the same threshold as the income tax proposal — for instance, $450,000 for married couples and $400,000 for single filers.

Estate Tax Returns

The estate and gift tax would decrease to $5 million for single filers and $10 million for married couples in 2022. These changes are a far cry to the 2017 Tax Cuts and Jobs Act approved by President Donald Trump that increased the number to $11.7 million for single filers and $23.4 for married couples.

Corporate Tax Rate

According to the proposed tax plan, the top federal corporate tax rate would increase to 26.5%. Although this increase is lower than the 28% proposed rate by the Biden administration, implementing the change will still make the US the country with the highest corporate tax rate.

Cryptocurrency

Cryptocurrencies will be subject to anti-abuse rules similar to bonds, stocks, and other forms of securities. “Wash sale” rules will also be applied to cryptocurrencies as an attempt to prevent investors from exploiting tax benefits after selling a losing investment.

Under the proposed tax law, investors have to wait at least 30 days to rebuy investments to avoid any penalties. 

IRA contributions

If a person’s account exceeds $10 million, they will be prohibited from making contributions to the IRA. This limit is also applicable for single filers with more than $400,000 taxable income and married couples with $450,000 taxable income.

Required Minimum Distributions Return or RMD

Individuals who are currently subject to RMDs, have taxable income above $400,000 (for single filers) or $450,000 (for married couples), and have a combined retirement account balance of at least $10 million will face higher RMDs. Higher RMDs would mean 50% of the amount of the retirement account in excess of $10 million.

Under the proposed tax plan, anyone with $15 million in their retirement accounts would have $5 million in excess, resulting in $2.5 million of RMD.

Roth IRA Conversions

Anyone, regardless of their income level, can convert assets from traditional IRAs to Roth IRAs under the proposed tax plan. This change also seeks to end “back door” Roth conversion by prohibiting after-tax contributions from being rolled or converted into Roth IRAs or Roth accounts.

Marriage Gaps

The proposed tax law carries provisions on “marriage penalties.” Aside from being charged with higher taxes from single filers, the ability of married couples to save for retirement will also be affected. Since high-earning married couples would belong to the highest tax bracket, they’ll likely contribute to tax-deductible retirement accounts to minimize their tax liability. 

Seek Professional Help

If the proposed law plan changes will affect you, work with a professional to discuss your financial options. Our team at Hagemann Wealth Management can help you with this matter as we’re the best wealth management firm in Illinois.

To learn more about our services and how we can help improve your financial health even with the proposed bill, contact us at +1 630-326-9007.

The opinions voiced and content in this material are for general information only and are not intended to provide specific tax or investment advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. LPL Financial does not provide tax advice.

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