Legislation introduced on September 13th, 2021 provides more clarity on tax increases the Biden administration is seeking to enact through the American Families Plan. The bill includes a host of tax increases on households earning more than $400,000 along with significant reforms to the estate and gift tax exemption, reducing the amount back to an inflation adjusted $5 Million for 2022.
Households earning more than $400,000 ($450,000 for married couples) would be subject to an increased top tax rate of 39.6% (currently 37%). It’s important to note, taxpayers currently in the $400,000 – $500,000 income range will see their marginal rate from 35% to 39.6%. Americans in this situation face a double whammy, not only are tax rates going up but the income thresholds to reach higher tax brackets are going down.
CG Planning Strategies – Employer retirement plans and Pre-Tax IRA’s offer the ability to defer income for retirement, decrease your current tax burden, and build a nest egg for the future. If possible, accelerating income into 2021. While this is not an option for all, business owners may be able to take advantage of this strategy. If you own a business, consider setting up a 401K with a Profit Sharing Plan. If you already have these plans and are maximizing contributions, consider a Cash Balance Plan to supercharge your deductions.
The bill also proposes a new top long term capital gains rate of 25%, up from 15%, on households earning more than $400,000 ($450,000 for married couples). The proposed changes to long term capital gains tax would go into effect as of September 14th, 2021. The 25% capital gains rate would be the highest rate imposed on taxpayers since 1997 when the top rate was 28%.
CG Planning Strategies – In addition to the tax saving strategies above, consider using tax efficient investment vehicles in after tax accounts subject to capital gains tax. Municipal bonds provide tax free interest for investors in higher income brackets. They can also be a good back up or alternative to cash earning little to no interest in a savings account. Index investing or exchange traded funds mitigate capital gains exposure over mutual funds. Permanent life insurance should be considered not only for death benefits but as a tax efficient investment vehicle. Permanent life insurance can be structured to maximize cash value while minimizing death benefits and therefore the cost of insurance. Any contributions to the policy can be invested similar to a mutual fund or index strategy to grow for the future with any gains being tax deferred. If structured properly, the cash value can be withdrawn without paying tax. In essence, this strategy works much like a Roth IRA for those taxpayers who earn too much to contribute and those looking for additional places to save in a tax efficient manner.
The bill comes with various other tax increases and traps to consider. Below are some other major items which by no means are all inclusive.
Eliminates backdoor Roth strategy, prohibiting Roth conversions of after-tax funds in retirement accounts.
3.8% Net Investment Income Tax to high income S corporation owners. This change increases the top tax rate from 37% to 39.6 + 3.8% = 43.4% for high income S Corporation owners ($400,000 single, $500,000 joint).
3% additional tax on income over $5 million and trust income over $100,000.
Required Minimum Distributions for taxpayers with high incomes ($400,000 single, $450,000 married) and total retirement accounts over $10 Million.
Having a meaningful understanding of your financial situation involves organizing all of the items that make up your financial life. Our client portal, CG Wealth Access, helps keep track of your assets & liabilities, investments and bank accounts, insurance policies, tax returns and estate planning documents. It’s a place where you can view your total financial picture with a digital safety deposit box for your important documents.
We anticipate that a change in tax policy will present a number of issues and we want to be ready to help you with strategies to mitigate those issues. Moving forward, your advisor or a member of our team may be reaching out asking for your help in gathering important information such as recent tax returns and estate planning documents. Furthermore, as we evaluate your situation and how the proposed tax law changes will affect you, we may request permission to speak with your CPA or estate planning attorney to discuss opportunities.
We are honored and humbled with the trust and confidence you have placed with CG Financial to achieve your lifelong financial goals. We are here to help navigate the proposed changes in tax policy. If you have any questions, please feel free to reach out to your advisor or a member of the team. We hope you have found this information useful and look forward to helping you meet your goals.
Please feel free to share this article with a friend, colleague or family member that may find this information useful.
Advisory Services offered through CG Advisory Services, an SEC Registered Investment Adviser. Securities offered through Geneos Wealth Management Inc. Member FINRA/SIPC.