Music has roused support for political candidates for as long as we’ve been holding elections. Whether you find yourself whistling along to “Yankee Doodle Dandy” or more recently shouting “We’re Not Gonna Take It,” during the Trump campaign, songs have a way of rallying constituents and capturing exactly how we’re feeling during a specific point in history.
But why wait until an election rolls around – why not delegate a theme song to what’s happening on Capitol Hill? In the case of President Biden’s Build Back Better Act, his proposed tax hikes for corporations and the wealthy might go over better with a catchy tune. And as a taxpayer, maybe you’ll remember it when you’re writing a check on April 15, 2022.
As the Beatles said in “Taxman”:
“Should five percent appear too small, be thankful I don’t take it all.”
Here’s what the President proposed and how the House Ways and Means Committee responded:
|Tax||What Biden Wants||What the House Ways and Means Committee Advanced|
|Corporate Tax Rate||Increase from 21% to 28%||Increase to 26.5%|
|Top Capital Gains Tax Rate||
||Increase to 25%…plus:
|Top Marginal Tax Rate||Increase for individuals from 37% to 39.6%on taxable income above $509,300 (joint) and $452,700 (single)||Increase for individuals to 39.6% on taxable income above $450K (joint) and $400K (single)…plus:
|Estate and Gift Tax Lifetime Exemption||
||Reduce from the current $11.7MM per person to an inflation adjusted $5MM per person (effective after December 31, 2021)|
|Retirement Account||What Biden Wants||What the House Ways and Means Committee Advanced|
|Roth Conversion Strategy||Eliminate the “back-door” Roth conversion strategy for individuals with taxable income above $450K joint and $400K single (effective after December 31, 2021)|
|New contributions to Individual Retirement Accounts (IRAs)||Eliminate new contributions to Individual Retirement Accounts (IRAs) if the balance exceeds $10MM and increase required minimum distributions (effective after December 31, 2021)|
Omitted from the House Ways and Means Committee proposal:
- Ending the “step up” in cost basis and taxing unrealized capital gains at death
- Repealing the current $10K cap on State and Local Tax Deductions (SALT)
- Raising the Top Qualified Dividend Tax Rate (along with the Top Capital Gains Rate) from 20% to 25% (historically the Dividend Tax and Capital Gains Rates have moved together)
So, maybe President Biden knew he wasn’t going to get everything he wanted. Maybe he started high, knowing that he would have to find a bipartisan common ground.
Well, it makes me think of what Rolling Stones always told us:
“You can’t always get what you want, but if you try sometimes, you just might find you get what you need.”
Now that I’ve got you “all shook up” (thanks, Elvis), let’s look at the road ahead for the Build Back Better Act and how it could affect you and your retirement if it’s passed.
On the political front, the bill heads to the House Budget Committee, along with the President’s Infrastructure bill. It will certainly be a political Lollapalooza to meet the September 27 deadline House Democrats set to get both bills passed. The outcome is not certain, as every Democrat must vote “yes” to get to the 50/50 split that would give Vice President Harris the deciding vote.
So, as Lenny Kravitz so eloquently sang:
“Baby, it ain’t over ‘til it’s over!”
As for the implications these tax increases could have on you, it depends. If you’re still building toward retirement and your taxable income falls in these ranges, you could feel the pinch. If you’re retired and drawing from your income streams, not earning taxable income like you did during your working days, you might avoid the hikes altogether. Take a look at Protecting Your Nest Egg from Taxes for some perspective and guidance.
We’ll continue to follow this legislation as it progresses through Congress this fall. And, as always, we at Capital Investment Advisors strongly recommend working with a trusted qualified financial planner and/or Certified Public Accountant (CPA) to discuss how these proposed tax increases may – or may not – impact you.
Sources: Strategas Research and Wall Street Journal