• Steve Coker, CFP

Tax Changes Are Coming: An update


After months of anticipation the House Ways and Means Committee has finally released their tax proposals. I have not written much about the coming tax law changes since the negotiations have been fluid and there is little value in reporting rumors or even proposals from individual congressmen. However, the release by the House Ways and Means Committee is a significant step since the proposal becomes the blueprint for drafting the law. While the bill may change as it makes its way through Congress, here are some of the key tax changes we are likely to see next year.


Note that the proposed legislation excludes some of the more controversial changes that were rumored. For example, the proposal does not eliminate the step-up of basis upon death. I for one am glad since this would have dramatically altered estate planning for millions of Americans. Similarly, the proposal does not equalize the top ordinary and capital gains rates, a move that could have pummeled investors with large capital gains. So far, there is also no change to the State and Local Tax (“SALT”) limitation. The deduction for state and local taxes was limited to $10,000 by the Tax Cut and Job Act, and many Democrats have spoken for repeal.


The proposal does make good on its promise to increase taxes on households earning more than $400,000, primarily by restoring the 39.6% marginal rate that was reduced to 37% by the Tax Cut and Jobs Act. It also lowers the income needed to get to the top bracket to $400,000 for individual filers and $450,000 for joint filers. As a result, those in the $400,000 - $500,000 range are likely to see the biggest increase in their tax bill. The proposal does increase the top capital gains tax rate, but only to 25%, not the 39.6% that some feared.


The proposal also changes key retirement plan rules, including some commonly used by our clients. The most significant change is the elimination of the back-door Roth strategy. In fact, the proposal eliminates Roth conversions of after-tax IRA’s completely, invalidating one of the best tools for RMD planning in retirement.


Estate taxes are also impacted. Among other changes the proposal would reduce the estate tax exemption beginning in 2022 to $6,202,000 per individual from the current $11,700,000 per individual. Those with estates impacted will want to review their estate planning before December 31st, 2021, to determine what changes may be appropriate.


As the picture becomes clearer, we will communicate the new tax rules and how it will impact our clients. Some changes may need to be made before year end. For now, it is worth noting that tax planning season is now upon us.