Latest Proposed Federal Tax Rules Change Again

November 03, 2021

We got a new tax proposal on October 28th!  And everything is different!

Our tax consultants report that nearly all of the changes we saw in the September 13th tax proposal are gone.  We can forget about updated tax brackets, the 25% maximum capital gains rate, the refundable child tax credit extension past 2022, the death of the back door Roth and the defective grantor trust, and edits to estate tax rules.  It's all gone!

We are very excited to learn that one of our favorite tax and retirement savings strategies - the back door Roth - has been preserved! So our mad dash before the end of this year to do Roth conversions has been given a respite.

Instead, it appears we are primarily left with the following changes to current tax laws that really only impact high income tax payers and businesses:

  • If you are a business owner and you have an S Corp, you may be impacted by changes to the Net Investment Income Tax (NIIT) on S Corp Profits - If MAGI exceeds $500,000 for a joint filer or $400,000 for a single filer, S Corporation profits will be subject to the 3.8% NIIT. 
  • High Income Surtaxes - Taxpayers will be assessed a 5% surtax on any modified adjusted gross income (MAGI) over $10 million, and an additional 3% surtax on any MAGI over $25 million.  This surtax does not differentiate between ordinary or capital gains income.
  • Qualified Small Business Stock treatment - We go back to 50% rather than 100% capital gains excluded on the first $10 million.

Plus for taxpayers obtaining their health insurance on the health exchanges, there are also some extensions to Affordable Care Act (ACA) credit phaseouts introduced in 2021.

And for those who have children, the refundable child tax credit, which was new in 2021, gets extended to 2022.

We'll re-run all client tax projections for 2021 in November to evaluate whether there are any tax rule changes that affect client taxes - and to identify any actions that need to be taken before the end of the year.

Contact us if you have questions about your tax situation for this year and next.