This week, the House of Representatives committee of Ways & Means outlined a series of tax increases that are aimed at offsetting a $3.5 trillion spending bill. What are the key aspects of the proposed tax increases and what can this mean for you? In this post, we will discuss the proposal on the table in Washington and what this could mean for your tax bill.
1. Individual Tax Rates – the question everyone is asking is, “are my taxes going up”? The proposal on the table is to increase the top marginal tax rate to 39.6%. This means if you are married filing a joint return, and your taxable income is over $450,000, any income over this threshold will now be taxed at 39.6%. For single individuals, this taxable income number is $400,000. There is also a proposed 3% “surtax” for those with a modified adjusted gross income above $5 million.
2. Corporate Tax Rates – this proposal would replace the current flat corporate tax rate with a graduated tax rate schedule. Specifically, the first $400,000 of corporate income would be taxed at 18%, income from $400,000 to $5 million would be taxed at 21%, and income over $5 million would be taxed at a rate of 26.5%.
3. Capital Gains Taxes – the latest proposal would increase the top tax rate for capital gains from 20% to 25%. The proposal also expands the current “Net Investment Income Tax” to include any investment income derived from a business for taxpayers with more than $400,000 of taxable income ($500,000 if married filing a joint return).
4. Estate Taxes – the current amount that one can gift to their heirs, estate tax free, is $11.7 million. The latest proposal would decrease this to $5 million, which was the estate tax exemption in 2010.
5. Retirement Account Changes – the legislation proposal also makes drastic changes to retirement accounts such as IRA’s and 401(k) plans. Under the current proposal, those with retirement account balances exceeding $10 million, and income over $400,000 ($450,000 if filing a joint return), would be prohibited from making contributions to a Roth IRA, Traditional IRA, or any company retirement plan.
In addition, those with retirement account balances exceeding $10 million would be required to take a minimum distribution for the year after their account balance exceeds the $10 million threshold. This minimum distribution would be 50% of the amount that is over $10 million. Again, this would only be for those with an income over $400,000 ($450,000 if married filing a joint return).
Finally, the latest proposal would eliminate the “back-door” Roth conversion strategy, regardless of income level.
While these changes have just been proposed by the House of Representatives Means & Ways Committee, the law that survives Congress may look very different. However, that doesn’t mean you should not have a plan should some of these proposals become a reality. Contact us today to find out how we can help you plan for changing tax rates.