How the Proposed Tax Changes Could Impact Your Financial Plan

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Published by Christina Hester Snyder, Associate Partner and Wealth Advisor

 

Major movement has occurred for the Biden administration’s Build Back Better Agenda. The $1.2 trillion infrastructure portion of the bill was signed into law in November and the social spending part of the bill, which will involve many tax changes, was recently passed by the House and is awaiting approval in the Senate.[1]

The social spending bill has far-reaching implications for people in all tax brackets, and it’s important to review the changes with a qualified professional in order to fully understand how your financial plan will be impacted.

We’ve put together an outline of the biggest tax changes to be aware of and what you can do to mitigate your risk. This is by no means an exhaustive list, so please be sure to familiarize yourself with the full text here.

 

What Will Change?

The tax portion of the Build Back Better Agenda is as expansive as the infrastructure plans themselves. Here are some key features of the proposed plan,[2] which will:

  • Create new surcharges on modified adjusted gross incomes (MAGI) greater than $10 million and $25 million. The surcharges would be 5% and 3%, respectively, and they would take effect in 2022.
  • Create new restrictions on IRA accounts with balances greater than $10 million. Additional contributions would be limited and required minimum distributions would be accelerated starting in 2022.
  • Raise the cap on the state and local tax (SALT) deductions from $10,000 to $72,500. This change would be extended until January 2032 and retroactive to the start of 2021.
  • Expand the 3.8% net investment income tax (NIIT) to apply to active business income for passthrough entities. The current tax only applies to passive investment income like interest, dividends, and capital gains.
  • Impose a 15% minimum tax on corporations with profits over $1 billion. The tax would be applied to the corporation’s book income, which is the amount that is publicly reported to shareholders. This change would take place starting in 2023.
  • Create a new excise tax on corporate stock buybacks. This tax would be 1% of repurchases occurring after December 31, 2021.
  • Increase IRS enforcement efforts to ensure that taxes are being paid. This strategy would focus on individuals earning more than $400,000 per year.
  • Roth conversions for high-income earners (i.e., backdoor Roths) will no longer be available starting in 2032. This applies to single filers making more than $400,000 and married couples making more than $450,000. It also prohibits any after-tax qualified retirement accounts (like 401(k)s) from being converted to a Roth IRA, regardless of income level, starting in 2022.[3]

Implications and Effect

The points listed above are not final at this point, and everything is subject to change. We are encouraging everyone to familiarize themselves with the changes that may be coming soon. Planning properly beforehand will put you in a better position to minimize any detrimental effects on your financial plan.

 

Be Proactive

No matter what happens with the scheduled social spending vote, we’ll keep you up to date and informed on any new tax laws that could affect your situation. At Jacob William Advisory, we can help you navigate the potential changes to mitigate your exposure to risk. If you have any questions or concerns about your financial plan and how it may be impacted by the recent legislation, reach out to us today by calling 410-821-6724, emailing info@jacobwilliam.com, or schedule an appointment at https://www.jacobwilliam.com/insights/#contact.

 

About Christina Hester Snyder

Christina is an Associate Partner and Wealth Advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.

[1]https://www.forbes.com/sites/jonathanponciano/2021/11/15/everything-in-the-12-trillion-infrastructure-bill-biden-just-signed-new-roads-electric-school-buses-and-more/?sh=70d6c92161f4

[2] https://taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/

[3]https://www.cnbc.com/2021/11/19/house-passes-build-back-better-act-retirement-plans-for-the-wealthy.html

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