Tax code

Talking about wealth: the tax code is changing


If you are confused about the ongoing discussions in Congress, you are not alone. These are some of the most complex legislative negotiations I have seen in my 20+ years in wealth management.

If you pick up one idea, it’s this: Work with knowledgeable and professional advisers, especially in times of uncertainty.

The question is how to finance the Build Back Better Act. The proposed funding is built around changes in income tax and retirement savings rules, particularly for high income, high net worth individuals and businesses. It’s possible Congress won’t pass the law, but here’s what we know so far:

Who would the new tax code affect?

Tax revisions will likely affect taxpayers with incomes over $ 400,000 (single) and $ 450,000 (spouse).

Income smoothing, where income is kept consistently below cutoffs year over year, or income pooling, where we alternate years of income above the cutoff and income below the cutoff, can help mitigate tax obligations.

Personal and trust income taxes

Tax rates will remain the same for people below $ 10 million. Income exceeding this amount would be subject to normal income tax plus a 5% surcharge. Income over $ 25 million would incur an additional 3% surtax. This means ultra-high net income taxpayers would see their marginal tax rate drop from 37% to 45%.

For non-granting trusts, the initial 5% surtax begins at $ 200,000 of income, and the additional 3% surtax begins at $ 500,000.

For these types of trusts, we examine possible changes in the way “income” is defined in trust agreements as a means of distributing trust income at lower tax rates.

Small business income taxes

Since the introduction of the 3.8% net income tax in 2013 to help fund the Affordable Care Act, active operating flow-through entities (S-Corporations or Limited Liability Companies) have been exempted. of its application. In the current proposal, the NIIT will apply to taxpayers whose income exceeds certain thresholds.

A small business owner generating more than $ 25 million would see their marginal federal income tax rate drop from 37% to 48.8%.

Society taxes

A minimum corporate income tax of 15% of accounting income is proposed for companies with profits over $ 1 billion. Companies that repurchase their shares will see an excise tax of 1%.

Taxes on pension plans

No new contributions to the pension plan would be allowed for anyone with combined pension plan balances greater than $ 10 million and incomes above the thresholds.

Conversions of pre-tax retirement dollars to Roth retirement accounts will no longer be allowed for single-filing taxpayers with incomes above the thresholds.

Converting after-tax pension plan dollars to a Roth IRA would be prohibited (goodbye “back door” conversions).

Congress seeks to capture tax revenue from extraordinarily large retirement savings accounts by requiring distributions of 50% of balances in excess of $ 10 million for taxpayers with incomes above stated thresholds.

Despite legislative uncertainty, an experienced and knowledgeable wealth management professional can help you make the necessary adjustments to achieve your goals effectively and efficiently.

And they should always consider the tax impact of financial decisions. Always.


For more information, visit www.capstone-advisors.com.