Getting into Biden’s New “American Families Plan” Tax Proposal

The new "American Families Plan" that came out of the House Ways & Means Committee on September 13, 2013 is filled with proposed large-scale changes across the board. I'm going to highlight a few of them but your takeaway from this should be that now is the time to go on the offense with your financial plan. If enacted, a number of things start from the introduction of the proposal 9/13/2021 and a lot more go into effect starting in 2022.  

Please scan through my list of top material changes and see if you think any of these are likely to impact you. If you want to chat, reach out. We like you and are happy to talk. 

A note for existing Prospero Wealth Financial Planning clients: Marcus and I will be diving into all of your plans to assess opportunities and will reach back out to you shortly (especially as these proposals look to get enacted).

Income Tax

• There's a new top marginal tax rate of 39.8% for incomes of $400k single (S) OR $450k married filing jointly (MFJ). What's probably more impactful is the compression at the 35% tax bracket. Individuals and married couples between $400-800k are going to feel this a lot. There are a number of ways you should look to accelerate taking income this year (Roth conversion/Business income/etc.).

• The top capital gains rate moves from 20-25%. This is lower than the original proposal of a 39.6% rate, but it kicks in at much lower income ($400k instead of $1MM). An interesting thing to consider is that this is effective as of 9/13/2021. This is another tax that will impact the upper echelons of the middle class disproportionately.

• Business profits from S Corps will be subject to a new 3.8% surtax for taxpayers with Modified Adjusted Gross Income (MAGI) $400k (S) OR $450k (MFJ). Section 199A deduction will be phased out at the same thresholds.

• New 3% surtax on all MAGI > $5MM (MFJ), $2.5MM (S) which doesn't sound like it will impact a lot of people until you realize there are a lot of one-time events that can trigger this — selling a business, etc.

In the retirement and Roth space, there's a bunch of closing of loopholes and changes that are a direct response to Peter Thiel accumulating $5B in his Roth account. 

Roth Conversions

• Prohibits all Roth conversions for taxpayers in the new 39.6% tax bracket starting 1/1/2032 (yes, you have 10 years).

  • However, Roth conversion of after-tax funds is prohibited as of 1/1/2022. This kills the "backdoor Roth" planning strategy.

Retirement Plans

• Prohibits Traditional IRA and Roth IRA contributions if:

  • Taxable income > $400k (S) / $450k (MFJ); AND (<— Yes, this is an AND clause; both bullets here need to be true)

  • Total value of IRA and defined contribution plans > $10M

• The limitation directly above does not apply to employer plans (401(k), SEP, pension plan, etc.)

• Imposes Required Minimum Distributions (RMD) of the same taxable income requirements as above AND IRA + defined contribution plans = >$10MM

  • If balance is between $10MM and $20MM, must distribute 50% of excess annually

  • If balance is greater than $20MM, must satisfy the 50% RMD above, but first distribute lesser of:

    • 100% of value above $20MM

    • 100% of balance in all Roth accounts (Hello, Peter Thiel, can we have our $5B back for taxation?)

• Prohibits IRAs from investing in companies where the owner has 'substantial interest.'

• Prohibits IRAs from owning any security with eligibility restrictions—those that require minimum income, assets, or any type of license. This means no more private placement opportunities. This doesn’t affect a lot of people, but those of us who use this strategy will feel it!

Grab bag

In addition to all of the major changes above:

• There is a tightening of wash-sale (adding crypto to the list and extending it to additional related persons/entities) rules.

• New rules around estate exemptions

• Changes to grantor trusts

• Extension of the Child Tax Credit 

• Makes permanent the "American Rescue Plan Act's" 'affordability percentages' to determine Health Insurance Premium Tax Credit.

Phew! That was an absolute mouthful. We'll be keeping our eyes on the legislation as it moves forward and reaching out to all of our existing planning clients with any opportunities we discover.