Democrats released details of proposed tax increases on September 14, 2021. This is phase one of Biden’s new American Families Plan tax proposal.
You might be wondering… what will it cost me?
To help answer that I updated the free version of our Tax Bracket Manager to reflect the current tax proposal.
You can access the free 2021-2022 tax planning calculator below. You can read about some of the proposed changes below the calculator.
If you aren’t sure how to use the calculator, check out our how-to guide and YouTube channel.
You can access the full text here. It’s 881 pages so you might prefer the short summary.
Tax proposal’s impact on ordinary tax rates
The tax proposal addresses specific changes to some tax rates. It does not address the inflation adjusted brackets.
The democratic tax proposal directly adjusts the 32% – 39.6% bracket.
The 32% and 35% brackets are squished. The 37% tax rate is replaced with the 39.6% rate.
Here are projected Ordinary tax rates used in the calculator:
As you can see, I updated the 2022 10% – 24% brackets by an inflation rate. The only tax brackets adjusted by the tax proposal are the 32% – 39.6% brackets. Those brackets are not going to be adjusted by inflation.
The calculator also increases the AMT brackets and standard deduction for inflation.
Tax proposal’s impact on capital gain tax rates
The headline change to capital gain tax rates is replacing the 20% tax rate with the 25% tax rate. This is a major reduction from the Biden Administration’s tax proposals.
Prior to this democratic tax proposal all focus was on changing the top capital gains rate to 39.6%.
Those tax proposals also indicated that the new capital gains rate would take affect for income over $1 Million. Instead, this democratic tax proposal starts the top tax rate at $400,000 of single taxpayers and $450,000 for married taxpayers.
The tax proposal also changes where the 0% capital gains rate ends. I don’t understand the point of this change. Seems like a waste of ink and paper.
Here is the breakdown of the proposed 2022 capital gains tax brackets:
There is no change to when the 3.8% net investment income tax. This provision is not updated for inflation. Single taxpayers begin paying the surcharge at $200,000 of AGI while married couples pay at $250,000 of AGI.
What are other provisions of this tax proposal?
Here is a breakdown of some other individual tax provisions in the democratic tax proposal. I plan on updating this as I learn more, so please check back for updates.
- Extension of 2021’s Child tax credit and Dependent care credits
- Calculate your DCFSA vs DCTC tax savings
- Assess Net Investment Income Tax (NIIT) on S Corp trade or business income
- Currently the 3.8% NIIT is only assessed against investment income
- Once taxpayers exceed $400,000 of taxable income NIIT will be triggered
- At this income level, S Corp income becomes classified as NII
- Married couples won’t pay until exceeding $500,000
- This is not part of the default calculation of the calculator
- Qualified Business Income (QBI) will be CAPPED for incomes of $400k single, $500k married
- The deduction is capped to $400,000 for single and $500,000 for married
- Modified Adjusted Gross Income (MAGI) in excess of $5,000,000 will pay a 3% tax on income (this is NOT reflected in the calculator)
- Elimination of the backdoor Roth IRA contributions for all taxpayers
- Elimination of Roth Conversions for taxpayers in 39.6% bracket… starting in 1/1/2032… not a typo
- Taxpayers in the 39.6% bracket with retirement accounts in excess of $10 Million will be required to make a Required Minimum Distribution
- Must be in the 39.6% bracket AND have $10 MM+ of retirement accounts
- All retirement accounts are grouped together (IRA, Roth, 401k, 403b, ect)
- Retirement accounts of $10 – $20 Million must make an RMD of 50% of the Excess
- Retirement accounts of $20 Million+ must make an RMD of 100% of the Excess
- RMD is not based on age. It is based on account size
- Example: $15 Million IRA for taxpayer in 39.6% bracket must take a $2,500,000 RMD
- $15,000,000 – $10,000,000 = $5,000,000; $5,000,000 * 50% = $2,500,000
- Example: $25 Million IRA for taxpayer in 39.6% bracket must take a $10,000,000 RMD
- $25,000,000 – $20,000,000 = $5,000,000 * 100% = $5,000,000
- $20,000,000 – $10,000,000 = $10,000,000 * 50% = $5,000,000
- Must be in the 39.6% bracket AND have $10 MM+ of retirement accounts
Planning Pointer: Tax bracket management (<– free mini course) for this crowd will be critical. There will be a lot of time spent trying to keep income below the 39.6% bracket. Roth conversions up to that income level will become critical planning. Tax bracket management for the win!
Will this tax proposal become law?
Like any first draft tax proposal it’s unlikely this text becomes law as it is written. You should expect changes. You should also expect that the bones of this bill becomes law.
The democratic party has pushed for changes to the state and local income tax deduction. This could get introduced later. That said…
The SALT tax deduction is so overblown. You might get to report the deduction but AMT wipes it out for most people. If you are a middle tax bracket taxpayer and don’t believe me, let’s chat. I can show you using the 2017 tax numbers on the Tax Bracket Manager.
Stay tuned for updates. If there are any aspects of the bill you would like updated inside the calculator please email me: curiousandcalculated at gmail dot com
Happy tax planning!
