Pending Tax Legislation
In this video article, join Brandon Baiamonte Director of Tax Strategy at Mission Wealth in a discussion about pending tax law changes. At Mission Wealth, we integrate and help coordinate with your CPA on Tax Savings Strategies. Through collaboration with your CPA, we review your prior year’s tax return and discuss any major changes expected to occur in the current tax year. From this, tax minimization strategies may be recommended. As a trusted fiduciary we act as your financial quarter-back as use our experience and resources to help create a total coordinated picture. Explore our tax services here.
The Latest Updates
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There have been updates since this article was originally published. Please find those below.
The House Ways & Means Committee recently released legislative text that includes tax increase proposals. It should be noted these proposals aren’t law, and more negotiation and compromise is likely, but it gives us an idea of where potential tax legislation currently stands.
Find nine noteworthy tax proposals to be aware of below. Watch the video for more expectations and observations.
- The corporate tax rate would increase to:
18% Up to $400,000
21% $400,000 - $5,000,000
26.5% $5,000,000+ - Increase in the top marginal tax bracket to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to single individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500.
- Increase in the top capital gains tax rate to 25%.
- Application of 3.8% net investment income tax to trade or business income. This provision expands the net investment income tax to cover net investment 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), as well as for trusts and estates.
- Limitation on Deduction of Qualified Business Income. The provision sets the maximum allowable deduction at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate.
- Surcharge for High Income Taxpayers. This provision imposes a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately).
- Decrease in unified credit for gift and estate taxes to $5,000,000 per individual, indexed for inflation.
- There are several proposals related to individuals with individual retirement plan balances over $10 million. This includes prohibiting further contributions as well as additional requirements for required minimum distributions.
- Prohibition on after-tax contributions in qualified plans. In addition, there would be a prohibition on converting after-tax contributions to a Roth IRA. This is sometimes called a “Back Door” or “Mega Back Door” Roth IRA conversion.
Watch Now
Original video publish date September 24, 2021. Negotiations are ongoing and content is subject to change without notice.
Tax Reform and Legislation
Almost everyone wants to pay as little income taxes as possible. We get nervous when we hear about taxes going up. It can be frustrating and cause uncertainty. It’s a good idea to work with your advisors to come up with a plan based on your specific financial needs and concerns.
Tax Proposals by the Biden Administration
Capital Gains Tax Rate: House Democrats propose raising capital gains tax to 28.8%.
One of the most talked about aspects of President Biden’s tax proposal is the capital gains tax increase from a maximum of 20 percent to 39.6 percent for those with income over $1 million. This almost doubling of the rate surprised many.
It is likely capital gains taxes will increase, but probably not to that extreme. However, an increase to 24 to 28 percent is quite possible.
There has also been speculation the capital gains tax increase will be made retroactive to either the beginning of 2021, or to some point during the year.
A retroactive tax increase is a possibility, but the more likely outcome is any increase would take place on January 1, 2022.
It might make sense to sell appreciated assets in 2021 that you were planning on selling over the next year anyway. Please discuss this with your advisors, as there are other factors to consider. As a reminder, any change in capital gains rates would likely only affect those with incomes above $1 million.
Income Tax Law Changes: Ordinary Income Tax Rates
President Biden has also proposed increasing the highest marginal income tax rate from 37 percent to 39.6 percent. It is quite possible this increase will happen.
Tax legislation that could significantly impact your estate plans.
There are several proposals related to estate taxes. The first one is the elimination of the step up in basis at death. Congress has attempted to eliminate this provision before, but failed. We will follow this closely, as it would be a significant change and require some planning.
The second proposal is immediate gain recognition at death on inherited assets. We believe this proposal is unlikely to become law.
The third possibility is a reduction of the estate exemption from $11.7 million to $5 million per individual. There has even been talk of lowering the exemption amount to $3.5m. This proposal could be made in lieu of eliminating the step up in basis described earlier.
You should consider finding and storing in one place any purchase documents for your assets (such as stocks, real estate, artwork, etc.). This will make it easier later to determine your basis in those assets. Mission Wealth has a secure portal to help store electronic copies of your sensitive financial documents.
We help you discover possible estate tax reduction strategies.
Through our thorough estate plan review, we can help you understand your current and future potential exposure to estate taxes, and discuss possible estate tax reduction strategies.
Other Tax Proposals To Be Aware Of
There are a number of other proposals to be aware of:
A potential change relates to the net investment income tax (NIIT) of 3.8 percent being assessed on income of shareholders of S-Corporations or limited partners.
There has also been talk of repealing or decreasing the deferral benefits of like-kind or Section 1031 exchanges.
On a positive note, we wouldn’t be surprised if the $10,000 itemized deduction limitation for state and local taxes was increased.
It will probably be late in the year before any tax proposals become law. The key take-away is that taxes are likely going to increase, but not to the extent some feared.
Your client advisor at Mission Wealth is available to help coordinate with your tax advisor and is a great resource to help plan for and implement any appropriate changes to your investments or financial plan based on the changing tax laws. Thanks for taking the time to listen and have a great day.
How Mission Wealth Can Help
At Mission Wealth, our tax management services work with you to minimize your tax burdens. We help you explore the most cost-effective solutions to help cover a number of possibilities. We have no proprietary products to sell and no quotas to fill. We simply offer independent, objective advice that serves your best interests.
Our Tax Management Services Include:
- Estate Tax Reduction Strategies
- Annual Tax Management Review
- Concentrated Stock Planning (Access to LPs)
- Integration & Coordination with CPA on Tax Savings Strategies
If you would like to learn more, please click here or complete the form below.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.
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