Clarity Capital Management Notables - September 20th 2021

*NEW* Clarity Capital Management Notables Audio Version CLICK HERE Listen to Eric & Ryan discuss the new tax proposal covered below

You may have heard by now that the Ways and Means Committee of Congress has put out some more concrete details around their proposed tax law changes. I don’t know about you, but we’re feeling exhausted reading through the new draft tax plan! It’s known as The American Families Plan, which includes Subtitle I. This section is titled “Responsibly Funding Our Priorities” (which we planners are most concerned with). The section of the bill clocks in at over 225 pages and has quite a bit of proposed tax related changes.  

Although this is only the current version and we expect some changes before becoming law, we believe that a lot of its features are likely to become finalized. As we continue to monitor the changes, we wanted to highlight some of the features that would have the biggest effect on our clients. We will be in touch with our affected clients to discuss any planning opportunities for this and future years.  

With that being said, let’s get right into it! Keep in mind that this is meant to cover what we feel are the most impactful items for the majority of folks. There are plenty of other provisions we won’t include as you’d likely be frustrated by the length of this email!  Income Tax 

• The bill proposes increasing the top federal marginal rate from 37% to 39.6% for income over $400K for single filers and $450k for joint filers. Additionally, it would “squish” the current 35% bracket a lot, and would create a new top bracket of 39.6% above that.

• The bill proposes increasing the top capital gains rate from 20% to 25%. This would kick in at an income level of $400k for single filers and $450k for joint filers. The original capital gains rates remain unchanged under these income limits. 
  • Important Note – the effective date on this is 9/13/2021 (yes, one day prior to the release of this bill). This applies unless there was a prior binding contract to sell.
• Business profits from S Corporations will be subject to a 3.8% surtax for taxpayers with MAGI over $400k for single filers and $500k for joint filers. 
  • This means “true” top rate for S Corp owners would increase from 37% to 43.4%
• Section 199A deduction (Qualified Business Income Deduction or QBI) limited to $400k single filers and $500k joint filers.

 ROTH Conversions – This section has our attention, and it’s one that we’re not too thrilled about! 

• ROTH conversions of after-tax funds in retirement accounts would be prohibited for all taxpayers starting 1/1/2022. 
  • Yes, that means say goodbye to our beloved backdoor ROTH contribution strategy that we utilize for many of our clients.
  • This also means say goodbye to conversions of after-tax dollars in 401(k) plans after this year (no more Mega Backdoor ROTH contributions).
• The bill prohibits all ROTH conversions for taxpayers in the highest (39.6%) ordinary income tax bracket, starting 1/1/2032 (no, that date is not a typo). 
  • This means a 10-year window to convert pretax accounts to ROTH and pay taxes upfront.

 Retirement Plans 

• The bill prohibits IRA contributions if taxable income is greater than $400k for single filers and $450k for joint filers AND the total value of IRA and defined contribution plans is > $10M. 
  • This does not apply to employer plans, like 401(k), SEP, SIMPLE, Pension, etc.
• It imposes required minimum distributions (RMDs) on large retirement account balances if they exceed $10M and the taxpayer is considered a high earner (same $400k/$450k income limits).

 New Wash Sale Rules 

• The plan includes explains that additional asset types would be subject to the IRS wash sale rule in 2022, including: 
  • Cryptocurrency/digital assets
  • Foreign currencies
  • Commodities

 Business losses 

• The bill makes permanent the current limit on excess business losses, which are considered losses over $250k for single and $500k for joint filers. These losses are disallowed and carried over to the following year.

 Child Tax Credit & Child/Dependent Care Credit  

• The bill extends the increased child tax credit and monthly advanced payments ($250 per qualifying child age 6-17/$300 per child age 0-5 through 2025). 
  • The credit is fully refundable. This means that even if the taxpayer has no tax liability at all, they still receive the credit. 
• It makes permanent the American Rescue Plan Act’s increased Child & Dependent Care Credit. 
  • Qualifying expenses: up to $8,000 for one qualifying individual or $16,000 for multiple, with two phaseouts. 
    • Phaseout starting at $125k AGI reducing credit from 50% to 20%.
    • Starting at $400k AGI reducing credit from 20% to 0%.

 Credit for Caregiver Expenses 

• The bill introduces a new non-refundable credit for expenses paid or incurred by a qualified care recipient. 
  • Maximum $4,000 credit – phaseout begins at $75,000 of income.

 Estate Planning 

• A host of changes primarily to Grantor Trusts in a decedent’s estate for estate tax purposes. Too many details to go over here, but likely not impactful to those with more modest estates.

We know there’s a lot here. At this point, we don’t want our clients to worry too much about it as we’ll be in touch with you as things change. This also means that we may need to act quickly on certain planning strategies, such as Backdoor ROTH contributions THIS year, as it’s very likely the last time we’ll be able to utilize this strategy.   As always, let us know if you have questions that come up. We’re always here to help!   

 Best,

Ryan Mohr, CFP®                            
 Principal
 503.388.5781 (text enabled)
 ryanmohr@claritycapitalmgmt.com
 
 Eric Thomas, CFP®
 Principal
 503.563.8299 (text enabled)
 ericthomas@claritycapitalmgmt.com

Subtitle I - Responsibly Funding Our Priorities - Section by Section Text

Here it is folks, enjoy the "light" reading! 

A History of Revolution in U.S. Taxation

U.S. taxation has undergone massive changes over the last 250 years. From the American Revolution to modern reform, explore its long history.

Historical Tax Rates and Highest Marginal Tax Rates

It wasn't long ago that the highest marginal rates were >70%. By early 80's standards, our tax rates today are still historically low. See below for both full historical tax brackets and a quick view of the highest marginal rates through the last century.

September Student of the Market