Potential Tax Law Changes Could Be On the Horizon

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The big questions: Did the Build Back Better Bill pass? 

The short answer: No – it has not: it remains very much in question. 

Americans are maintaining the status quo while patiently awaiting a reasonable tax reform. As of today, the extensive list of “Build Back Better” proposals were not passed as originally planned. The democrats are currently making revisions to the well-awaited BBB Act.

The Act, as it stood, included $1.75 trillion in proposed spending for environmental and social programs, with most of the proposed funding coming in the form of new taxes.

 

BE PROACTIVE: A GUIDE TO TAX PLANNING FOR THE NEW YEAR!

 

Since passing the Democratically-held House in November, the Senate stalled the progress of the package. While Democrats are using budget reconciliation procedures to advance tax legislation over the Congressional Republicans objections, to do so they must secure the almost-unanimous support of House Democrats plus the unanimous support of all 50 Democratic Senators. 

At this point, it’s hard to be sure what the final bill will look like – if one passes at all. As a financial advisor in Bountiful, Utah, here’s what I believe you need to know about President Joe Biden’s proposed tax law changes for 2022 found in his “Build Back Better” Act.

Who Could Be Affected?

The proposals within the original Act cover a wide range of tax laws, though, as part of his agenda while running, the president is focusing his efforts on the highest earners and ultra-wealthy, as well as businesses and corporations.

In fact, the Biden administration pledged to not raise taxes on households earnings less than $400,000 per year. If you’re near or over this mark, you may want to review your situation with your financial advisor, estate attorney, and/or tax professional.

Remember, if any legislation is passed during 2022, it’s likely the changes will take effect January 1st, 2022.

The Specific Changes

Read the following categories for abbreviated details regarding the proposed changes.

Tax Rates for Individuals

Although previous proposals included an increase of the top tax bracket from 37% to 39.6%, the change was not included in the package that passed the House. We will have to wait and see if the Act will contain adjustments to the taxable income brackets, regardless of filing status.

As a refresher, here’s what the proposed tax brackets look like for single filers and married couples filing jointly (images from nerd wallet):

**These are the same rates you will be paying for the 2021 tax year**

IRAs and Retirement Plans

Currently, income limitations apply to making Roth IRA contributions. No contributions are allowed for single filers with MAGI (modified adjusted gross income) exceeding $140,000. For married couples filing jointly, the MAGI cannot exceed $208,000.

Proposed changes include individuals with aggregate balances of $10 million or more in retirement accounts (including traditional and Roth IRAs, deferred compensation, and defined contribution plans – such as 401(k)s) at the end of the prior taxable year would be prohibited from making IRA contributions if their annual income exceeds: 

  • $400,000 for single filers
  • $450,000 for married couples filing jointly
  • $425,000 for head of household

Additionally, changes to required minimum distribution (RMD) rules and a new excise tax on “additional contributions” by high-income earners will be in effect for those with retirement account values over the $10 million threshold.

Finally, a provision in the House bill would eliminate “back-door” Roth IRA conversions, though that piece of the new law would not take effect until the year 2032.

If the Act becomes law, your financial advisor in Bountiful UT, will need to work to develop and implement new tax-efficient strategies to comply with the new regulations while simultaneously optimizing your global financial plan.

Estates and Businesses

The proposed changes include new surtaxes on both trusts and businesses, specifically targeting those earning high incomes. 

The details of these two categories are fluid, but if any legislation passes, expect alterations to the current tax code in these areas. 

If you have one, contact your estate attorney and/or tax professional to see if there are any steps you can take to prepare.

Corporations

There are several changes regarding corporations, including a 15% alternative minimum tax (AMT) of those reporting more than $1 billion in profits to shareholders. 

Also, a new 1% excise tax on the value of stock repurchased by a publicly-traded U.S. corporation would be applied. This figure is significant given the recent surge in popularity of stock buybacks over the last few years. In fact, the total stock repurchased in 2021 reached more than $850 billion.

*Note: The above list is not comprehensive, and lacks much of the detail needed to make any tax planning decisions. The goal of this article is to make you aware of the proposed changes that will affect the largest number of individuals.

If you’ve been delaying estate gifts, Roth conversions, real estate investments, retirement contributions – anything that may be affected by this legislature, do it now. The tax code isn’t likely to be more favorable in the near future.

To optimize this process – and lower your stress burden – consider hiring professionals in your area. If you’re unsure about how you will be affected by the pending changes, reach out to your financial advisor for their opinion. Or maybe it’s time to start looking for a new advisor – to set some up-to-date financial goals.

The Legislative Process from Here

Since passing the House on November 19, 2021, the package still requires Senate approval and presidential signature to become law. 

Given the upcoming midterm elections (November 2022) – where all 435 House seats and 34 Senate seats will be contested – and the general political atmosphere, many members of Congress are not anxious to put the proposal to a vote. This is especially the case for moderate Democrats, who will likely face stiff competition this election cycle.

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Where You Stand

Whether the Act becomes law this year, next, or never, your financial plan should be prepared for any one of the outcomes. If you feel like you’re in the dark, you don’t have to stand it alone. Discuss standard deductions and itemized deductions with your trusted professional.

Our team of financial planners are trained and educated for times like this. Speak with a financial advisor at Advanced Retirement Strategies (ARS) today to see how you can best prepare for any direction Congress may take. 

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CERTIFIED FINANCIAL PLANNERS™ at Advanced Retirement Strategies

Working with a CERTIFIED FINANCIAL PLANNER™ is an excellent investment of your time and money. With the high standards for CFP® certification, you’ll know you’re getting the expertise and knowledge of a highly-trained and educated professional who will always act in your best interests and with the loftiest ethical standards.

Our team of retirement planners and investment advisors in Bountiful, Utah specializes in helping diligent savers with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement.

If you’re looking for a CFP® to help you live the retirement you have dreamed of, contact us now.

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