Since the Presidential Campaign, we have heard about proposed ideas for the all-encompassing tax increases to come for Americans. Just last week, nine months into the year, the House Ways and Means Committee finally put to paper the first-round draft of the new tax code.
While some items resemble Biden's tax proposals, several of the more extreme increases didn't make the cut indicating that some negotiations have already taken place. With the narrow majority, the Democrats need every single vote for a victory. I expect to see many rounds between the House and the Senate. I also anticipate that many items included in this proposal will become our new tax law. Here are the three big things, you need to know.
The current top ordinary tax rate sits at 37%. With Biden's many campaign promises, it's no surprise that the maximum tax rate would be under attack. As of January 1st, the proposed top bracket increases to 39.6%. The 2.6% isn't the whopping blow; it's the compression of the brackets, along with the return of the marriage penalty, that has a much more significant impact.
Many of Biden's proposals suggested that capital gains rates for those top-earning Americans would increase to match the ordinary income rates. For those with income over $1,000,000, that would have increased from 25% to 39.6%. Ouch! The good news on that front, the current proposal is not as harsh, modifying the current 20% tax rate to 25%. Of course, there is a but; the 25% tax rate kicks in at the $400,000 single/ $450,000 MFJ income level versus Biden's original proposals that suggested $1,000,000. Sure, it's a minor rate increase, but at that level, the higher rate will impact many more people. If this proposal passes, it will surely be a government budget win.
One more thing to note, the capital gains rate changes in this proposal have an effective date of 9/13/21. Contracts to sell with a binding date before the effective date will be grandfathered in. If that sticks, those of you looking to lock in capital gains at the lower tax rate before the bill is passes won't be granted the same waiver.
Plenty of talks surrounded eliminating the step-up in basis awarded when assets are inherited or a transfer tax. Yet, thankfully, that did not make it into the first round draft. The first proposal does change the estate and gift exemption levels back to pre-2017 Tax Cuts and Jobs Act levels . That means an estate for a married couple would face the 40% estate taxes on an estate sized over about $12 million, vs $24 million with the current tax regime. That still will only impact a minority of families, but it makes it important for some to do estate planning.
The current proposal is enduring mark up before headed to the House for a vote. The Senate has yet to release a proposal. Both are significant in reaching an agreement for the next tax code. I only highlighted the top three proposed changes, but the legislation is filled with many more increases with various effective dates aimed at increasing taxes for the wealthier Americans. Some people may still have an opportunity to front-run the system and lock in the current rates. Stay tuned to River City Wealth Management for updates that may impact you and reach out to us if you would like to learn how planning could help save you tax dollars.
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