The 2021 Democratic tax proposal that just came out of the House Ways and Means committee has a number of surprises in it but mostly sticks to a theme “tax high income earners and the uber-wealthy.” While the proposal is not law, there are some planning issues you need to consider in case it does become law.

The backdoor Roth and Mega backdoor Roth may be dead…


First, and most pertinent to many of our clients – it looks like the backdoor Roth and mega backdoor Roth IRA strategies could be on the way out. The bill would no longer allow the conversion of after-tax contributions. This kills the backdoor Roth & mega backdoor Roth strategies. 


Action: If you have after-tax contributions languishing in an IRA somewhere you need to figure out whether or not you should convert them now. If the law passes this would mean no more after-tax IRA conversions in 2022 and beyond.


Action: If you’re a high income solo-preneur with a solo-K you need to get serious about whether or not you can implement a mega backdoor Roth strategy now. Remember, you have to convert the after-tax money prior to 2022


**Talk to your Certified Financial Planner Practitioner™ and tax advisor.**


It’s back: the 39.6% tax bracket 

No real surprise here but taxes are going up. First, under the proposed plan the 32% and 35% brackets would be condensed (which means you would be in a higher bracket faster). Adding insult to injury, the 37% tax bracket would be scrapped and the 39.6% tax bracket was re-introduced in this bill and it now starts at $400k+ for single filers and $450k+ for married filing jointly.

We must take a moment to note how profoundly ridiculous this is – a single person making $399k is fine but a married couple where each earns $230k is slated for the highest tax rate?

Action: Consider pulling income forward into 2021 if you are a high income earner who may be affected by these higher tax rates. 

This is easier for business owners. Normally high earners seek to defer paying taxes. In this case, you may want to accelerate your income to pay taxes at a lower rate. Continue to maximize pre-tax savings opportunities. Do not neglect your HSA.

Action: Consider whether certain deductions would be more valuable in 2022. For example, you may wish to defer a charitable donation until 2022. 


3.8% Surcharge on S-corp profits 


High income business owners (MAGI $400k+ for single, $450k MFJ) would face a 3.8% surcharge to S-corp profits in the proposed bill. According to Jeff Levine, CPA/PFS, CFP® of Holistiplan, this means their effective top tax rate would be 43.4% not 39.6% (Source: Twitter @CPAPlanner)


Action: The S-corp election still offers tax savings vs. taking all income out as W-2 earnings as you can avoid FICA taxes. Run the numbers with your CPA.


Higher Capital Gain Rates

The proposed bill would increase the highest capital gains tax rate from 20% to 25% effective 9/13/2021 (unless you have a binding contract to sell). This new higher rate kicks in at a lower income level ($400k Single/$450k MFJ).


Action: If you are selling a business and have a binding contract to sell in place on or before September 13, 2021, rejoice then confirm with your tax and legal team if you would qualify for the lower capital gains tax rate. 


Action: If you are in a high income tax bracket now and you are considering selling appreciated stock, consider whether or not you will be retiring soon or otherwise find yourself in a lower tax bracket. If so, you may be able to avoid the higher proposed capital gains tax by waiting until your income is lower.


Disclosure: There are many important reasons why you may wish to sell and recognize a capital gain even at higher long-term capital gains tax rates. Taxes are only one consideration. Please consult with your Certified Financial Planner ™.

Cryptocurrency Would Be Subject to Wash Sale Rule

Currently, if you own cryptocurrency at a loss, you can sell it and turn around and buy it again without running afoul of the wash sale rule. With most investments this would trigger something called a “wash sale” and the loss would be disallowed (you wouldn’t be able to use it to offset other capital gains or ordinary income). 


Action: If you own cryptocurrency at a loss you may wish to consider selling the coins you own and re-purchasing them (if that still makes sense for you) to recognize the loss in 2021 without worrying about the wash sale rule. 


Talk to your CPA.

Grantor Trusts and Valuation Discounts

Grantor Trusts are a popular type of estate planning technique that allows an individual to move an asset out of their estate that they anticipate will significantly grow in value. In order to qualify as a Grantor trust the individual who sets up the trust must retain some sort of control over the the assets (i.e. they may pay the income taxes on the assets, retain rights to the income or corpus, etc.). Certain types of grantor trusts would be curbed under this law. Popular examples of trusts that may be impacted include Grantor Retained Annuity Trusts (GRATs), Spousal Limited Access Trusts (SLATs), and Irrevocable Life Insurance Trusts (ILITs).


Some individual and business owners have used valuation discounts to reduce the value of gifts they make to their heirs. These valuation discounts can be used to reduce the size of the gift an individual makes to their beneficiaries allowing them to pass more wealth estate tax-free. The bill would provide that “non-economic” discounts would be restricted going forward.

Both of these strategies are relatively common estate tax planning strategies. If you have been contemplating implementing one you need to reach out to your attorney and Certified Financial Planner®. It is our understanding that trusts drafted and funded before 2022 would be grandfathered in.

Estate Tax Exemption 


The proposed bill would reduce an individual’s gift and estate tax exemption to about $6 million (adjusted for inflation) starting in 2022 vs. 2021’s $11.7 million per person exemption. Many estate planning advisors are reminding clients that gifts can be made without fear of them being clawed back into their estate. So far, the IRS has not given any updated guidance saying they would clawback these gifts.


The issue really becomes, for those with estates who would be affected by a lower estate tax exemption, how much can you “safely” give away? With a top estate tax rate of 40% it pays to think through this carefully. You don’t want to jeopardize your own financial security and at the same time, the hard dollar costs of not planning for this lower estate tax exemption carefully are high. 


What’s not in the bill

No SALT fix – yet. 


Originally imposed with the Tax Cuts & Jobs Act (TCJA) in 2017 the State and Local Tax cap limits the amount of state and local income taxes a taxpayer can deduct on their Federal tax return to $10,000. This provision disproportionately affects people in high property and income tax states. However, many high income earners all over the country have also been negatively impacted. 


For example, Amy and Brandon are both employed and have a joint household income of $250,000. In Virginia they would pay a little over $14,000 in Virginia state income taxes. They also own a home valued at $525,000 and pay $4,500 a year in local property taxes.


Their total SALT Tax liability would be $18,500. However, only $10,000 is currently deductible on their Federal return. At a 24% Federal income tax rate the SALT cap costs Amy and Brandon about $2,000 a year.


This has long been on the Democrats radar and generally, we would be surprised if a repeal of the SALT cap wasn’t included in a final bill.


Step-up in basis


Under current law, when you die property you own gets a step-up in basis. What this means is that if you own $200,000 in ABC stock that you bought for $50,000 – you have a $150,000 capital gain. Assuming you owned ABC stock for at least one year, if you sold ABC stock, you would owe long-term capital gains tax on your gain. 


At a 15% long-term capital gains tax rate that would cost you $22,500 in federal taxes.


However, if you die the stock’s basis becomes the price of ABC stock on the date of your death (unless your executor makes an election to have the assets valued 6 months after your death). This means that now your heirs can sell ABC stock without paying any capital gains tax. This saves your heirs $22,500 (or more if their capital gains tax rate is higher than your 15% rate).


There are several proposals around how this transfer of wealth should be taxed. They range from taxing it all at the date of death, to a carry-over basis proposal, to no change. However, this particular proposal (in its current form) does not address the step-up in basis rule at all.


Have questions? Book a call at the top of this page or drop your email information below and we will reach out to you.


Contact Us


Pin It on Pinterest

Share This