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Proposed Tax Changes

How will your bottom line be impacted?


  • Several proposals have been made that impact more than just the ultra-wealthy.

  • Collaborate with your financial planner, tax advisor and estate planning attorney to see how you could be impacted.


Several tax reform proposals have been announced throughout the year. While most of these provisions are intended to impact the ultra-wealthy, there are some proposals that, if passed as they are, would impact middle and upper-middle class individuals and families.

These proposals are still in the initial stages and are likely to be altered to some degree, so it’s important for you to stay up to date on these changes so that you can navigate this ever-changing landscape.

NOTE: All income thresholds mentioned below (ex. $400,000/$450,000) reflect single filers vs. married filing jointly (MFJ). The following proposals are subject to change. The “probability of passing” reflects the opinion of FMI.

Proposals for income, gains, & estates

Higher individual income tax rates

Current: Highest marginal tax rate is 37% at $523,600/$628,300.

Proposed: 39.6% at $400,000/$450,000; 42.6% if over $5 million

Probability of passing: High, specifically the rates. Income thresholds will be contested.

One of the most well-known proposals is to increase the highest marginal income tax rate to pre-Tax Cuts and Jobs Act (TCJA) levels. This would mean that the top marginal rate would increase from 37% to 39.6%. The rate increase doesn’t sound like much on the surface, but it’s the number of dollars captured in the bracket that would make a significant impact. The new rate would apply to individuals and married couples with more than $400,000/$450,000 in income– much lower thresholds than what are currently in place. And, if you have modified AGI over $5 million, a 3% surtax would also apply – making the highest income tax bracket actually 42.6%.

Higher long-term capital gains tax rates

Current: 15% or 20%, with 20% starting at incomes above $445,851/$501,501.

Proposed: Retroactive 25% at $400,000/$450,000; 43.4% if over $1 million.

Probability of passing: Low, specifically the retroactive aspect.

Long-term capital gains rates are meant to encourage long-term investments and are applied to investments that have been held for greater than one year. Currently, the highest long-term capital gains tax rate is 20% and applies to incomes above $445,851/$501,601. If this legislation passes, the highest capital gains rate will increase to 25% and apply to incomes above $400,000/$450,000.

The most important aspect about this proposal is that this rate would be retroactive and apply to any gains realized on or after September 13, 2021, NOT starting in 2022. If you are above these new income thresholds, be mindful of realizing capital gains between now and the end of the year.

Lower gift and estate tax exemptions

Current: $11.7 million/$23.4 million.

Proposed: $6 million/$12 million.

Probability of passing: Moderate

Under the current law, individuals and married couples can transfer $11.7 million/$23.4 million, without owing gift or estate tax. The new proposal calls for a reduction to about half of these amounts. If you have a net worth of $11.7 million today and die next year after this goes into effect, that could be the difference between $0 in estate taxes and $2.28 million. The good news, is that you have until the end of the year to take advantage of using the full $11.7 million estate/gift tax exception amount before it would be reduced.

Proposals for changes to retirement accounts

Limit on High Income Earner Contributions to IRAs

Current: No income limits apply for making Traditional IRA contributions.

Proposed: Ineligible if IRA balance exceeds $10 million and income exceeds $400,000/$450,000.

Probability of passing: Moderate

If the total value of an individual’s IRA and defined contribution accounts, such as 401(k)s and 403(b)s, exceed $10 million at the end of the prior year, AND income is more than $400,000/$450,00, then Traditional IRA contributions would be prohibited. It is unclear if this rule would also apply to contributions into 401(k)s, 403(b)s, etc. But the way it reads now is just Traditional IRAs would be impacted.

Limits on tax advantaged account balances

Current: No cap. RMDs begin at age 72 with distributions based on life expectancy tables.

Proposed: What we’re calling a “soft cap” of $10 million. New RMD of 50% of any balance over $10 million if retirement balances exceed $10 million and income exceeds $400,000/$450,000.

Probability of passing: Low

With the recently passed SECURE Act, Required Minimum Distributions (RMD) now begin at age 72, but there is a proposal to add a new RMD driven by retirement savings balances. This new proposal states that if your combined account balances between Traditional IRA, Roth IRA, and defined contribution plans (401(k), 403(b), etc.), exceed $10 million AND your income is above the $400,000/$450,000 threshold, then you would be required to take a distribution equal to 50% of balances over $10 million. For example, if you had $11 million, you would have an RMD of $500,000 (50% of $1 million).

Income limits for Roth conversion of pre-tax balances

Current: No income limits.

Proposed: Ineligible if income exceeds $400,000/$450,000.

Probability of passing: Low

Under current law, anyone can take advantage of Roth conversions, regardless of income. The new proposal would prohibit Roth conversions for both Traditional IRAs and employer-sponsored plans for taxpayers above the $400,000/$450,000 income thresholds.

To be candid, this proposal doesn’t make any sense. When you convert pre-tax balances to Roth, you pay ordinary income tax rates on the converted amount. So, if the government wants to increase tax revenue on incomes over $400,000/$450,000, then you should want that specific income demographic to convert pre-tax balances to Roth so that they pay even more in taxes. The proposed increases to ordinary income tax rates will already deter anyone is this income range from doing Roth conversions, so you don’t need to “penalize” them by making them ineligible for Roth conversions.

Income limits for Roth conversion of after-tax balances

Current: No income limits.

Proposed: IRA and 401(k) Plan after-tax conversions would be prohibited.

Probability of passing: Moderate

This provision would also prohibit the conversion of any after-tax retirement contributions to Roth, putting an end to “Back-Door” Roth IRAs. If passed, it would be very unfortunate because this is a very powerful planning tool used by many who do not earn $400,000/$450,000.

Proposals to close loopholes

Step-up in cost basis at death

Current: Primary residences, taxable investments, and other assets are eligible.

Proposed: Step-up goes away except for farms that will continue to operate.

Probability of passing: Low

The step-up in cost basis is an estate and legacy planning tool that practically anyone can benefit from using. Your cost basis reflects how much you invested in an asset – property, stocks, etc. Under current law, when a beneficiary inherits an asset, their cost basis gets adjusted or “stepped-up” to be the asset’s market value on the decedent’s date of death, thereby reducing and, potentially eliminating, any realized gains. Here’s an example:

I invested $1,000 (cost basis) in ABC stock and it is currently worth $10,000. If I sold that position, I would realize a gain and pay taxes on $9,000. But, if I passed away, my husband’s cost basis would be adjusted to be $10,000, and, if sold, would not be recognized as having any gain.

Carried interest (private equity and hedge fund partners)

Current: Receive partnership interests tax-free, pay capital gains tax rates upon sale.

Proposed: Partnership interests would be taxed as ordinary income rates, taxed at ordinary income and/or capital gains rates upon sale

Probability of passing: High

Because this is a loophole that predominantly benefits venture capital, private equity, and hedge fund partners, it is likely that we’ll see something targeted at ending this.

1031 Exchanges (real estate "like-kind" exchanges)

Current: Unlimited capital gain deferral with qualified exchange.

Proposed: First $500,000 of capital gain is deferred with qualified exchange.

Probability of passing: Moderate

Currently, if you sell an investment property for a gain, then you can defer the taxation of that gain by “rolling it” into the purchase of a qualified “like-kind” property. While this may be seen as a strategy used for the wealthy, this is something any real estate investor can benefit from using.


Tax planning goes beyond filing your tax return. Comprehensive tax planning should always be a part of your overall financial plan. Work closely with your financial planner, tax advisor, and estate planning attorney to thoroughly analyze your situation and determine how these proposed changes might impact you and your bottom line.

Katie Blechschmidt, CFP®

Director of Client Success



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