FOCUS: Analyst says to review portfolio on proposed tax law changes

By Kyra Morris, contributing editor  |  Many  may be concerned about the changes in the new taxes under the $1.75 trillion Build Back Better Act, which is President Joe Biden’s signature social safety net and climate change bill.  It has received a procedural vote in the House and still needs a final vote before it heads back to the U.S. Senate.  

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The analysis from the nonpartisan Congressional Budget Office indicating the ultimate cost of this bill will be a determining factor. This article reviews the proposals as of Nov 6, and may at least give us some guidance and potential planning ideas. 

Little change for many.  The first thing that needs to be remembered is that if your taxable income is below $450,000 for married filing jointly (MFJ) or $400,000 for single (S) taxpayers, the proposed new tax laws have very little changes.  The only significant marginal tax bracket change is that the 35 percent tax bracket has been reduced since the return of the 39.6 percent rate begins at $450,000. This level of $400,000 (S) and $450,000 (MFJ) does make it so that the majority of taxpayers are not affected by the increase in rates.  

No rate changes for most. Dividends and long-term capital gains rates also do not change from current rates for taxpayers making less than $450,000.  Above $450,000, the rates go from 15 percent to 25 percent.  This eliminates the current 20 percent rate. 

Keep your eyes open.  There are some other items that taxpayers should be aware of and keep their eyes on:  

• State and Local Tax Deduction (SALT) – Cap increased to $80,000 for the years 2021 to 2030, then reverts back to $10,000 in 2031.
• Child Tax Credit extends into 2022 phasing out the higher credit amount for families with  Adjusted Gross Income (AGI) greater than $112,000 for single (S) or $150,000 for married filing jointly (MFJ)
• No IRA contributions can be made if taxable income is greater than $400,000 for single (S) or $450,000 for married filing jointly (MFJ) and if your total qualified plan balances are greater than $10,000,000.
• No ROTH conversions if taxable income is greater than $400,000 for S or $450,000 for MFJ.
• Business surtax of 3.8 percent of S-corp income with Modified Adjusted Gross income (MAGI)  $400,000 for S or $500,000 for MFJ.
•  Qualified Business Income (QBI) deduction would be capped at $400,000 S and $500,000 MFJ.
• Adding or improving tax breaks for green energy and energy efficiency – 
  • Credit jumps from 10 percent to 30 percent for nonbusiness energy property for your home and for residential energy efficiency property – solar, wind, geothermal or fuel cell technology.
  • Creating a 30 percent tax credit for qualified wildfire mitigation.
  • Up to $12,500 for purchase of a new plug-in motor vehicle and $4,000 for the purchase of a used plug-in electric vehicle.
• A surtax on millionaire taxpayers equal to 5 percent with MAGI from $10,000,000 to $25,000.000 and then 8 percent for above $25,000,000.
• Increasing the Net Investment Income (NII) surtax  to 3.8 percent.  NII includes but is not limited to interest, dividends, passive rents, annuities and royalties for MAGI greater than $200,000 S or $250,000 for MFJ.
• Improving Earned Income Tax Credits for 2022 by lowering the minimum age to 19 and eliminating the maximum age limit, increasing the maximum credit, and expanding the eligibility rules for former foster youth and homeless youth.
• Adding tax breaks for education – for example, no income tax on federal Pell grants.

There are a lot of changes.  The bulk of these changes that are considered detrimental to the taxpayer are for those taxpayers with taxable income greater than $400,000 (Single) and $450,000 (Married Filing Joint).  If you’re in that category, you need to get together with your tax and investment advisor now to become more familiar with the rules that are going to affect your situation.

If you are a closely held business, there are issues that also should be considered and potentially planned for now.  Get your business finances in order and get with your advisor.  

If you have other targeted areas of these potential law changes with children, education, energy credits, etc.,  you should also start considering your situation and contact your advisor.  At least ask the questions.  Your advisor must digest a lot of this information, and a good question that is relevant will help them focus and learn more also. 

The tax ramifications are comprehensive and complicated.   For most taxpayers, the changes aren’t going to be in tax bracket rates. They will be in other areas such as child credits, plug-in vehicle credit or earned income tax credits.  For business owners and investment-heavy taxpayers, more guidance and final facts are needed.  There is a lot to digest.  Now is the time to review your financial situation and see if there are planning techniques that can benefit you.  

Kyra H. Morris, a Certified Financial Planner, is CEO of Morris Financial Concepts, Inc., in Mount Pleasant. A national leader in the financial planning profession, she has been named several times by leading magazines as one of the country’s top financial planners.