On Tuesday The Ways and Means committee released the much-anticipated tax change proposal. While the changes aren’t as shocking as Biden’s earlier version, they are broad-ranging on who they impact and to what extent. Below is a cliff notes version of what may affect your IRS bill.
Personal Income Tax
The top tax bracket is suggested to increase from 37% to 39.6%, a move that won’t surprise many. But the change is sneaky in that it would apply to income over $450,000 (married filing jointly) versus the current top tax bracket of $628,300, applying to many more tax payers than the current bracket structure.
Long Term Capital Gains
Far better than initially proposed, the House proposal is for long term capital gains to go from a top rate of 20% to 25% for households making more than $450,000 (married filing jointly). This is a big decrease from Biden’s suggestion on 39.6% on gains over $1mm. Soon-to-be sales beware: the proposed effective date of this change is retroactive to September 13, 2021.
One of my favorite planning tools, the backdoor Roth IRA is on the chopping block. The proposal would limit Roth conversions to households with less than $450,000 in income (married filing jointly). One silver lining is that this change isn’t set to take place until 2032 leaving many 10 years to convert non-deductible IRA contributions.
Right now crypto is exempt from wash sale rules, which state that investors have to wait 30 days after selling a security before they can repurchase it. With the volatility of crypto, right now investors can sell at a loss to offset gains and immediately repurchase. Crypto currencies would be subject to wash sale rules, with violators losing the ability to deduct losses.
Exchange Traded Funds (ETFs)
ETFs are a popular way to invest in the stock market because they tend to be able to be purchased in lower denominations with low management fees. But another major benefit of ETFs is that they have some unique beneficial tax features. Unlike a mutual fund, which passes through the manager’s gains and losses annually to investors, ETFs aren’t taxed until they are sold, either as a capital gain or loss. The change would eliminate the tax deferral of ETF turnover and require investors to pay taxes annually on fund changes.
Only time will tell if the proposed changes make it past congress and the Oval office. In the meantime, enjoy your week and current tax bracket.
P.S.- Hayes Wealth Advisors works exclusively with Optometric Practice owners to help them build wealth outside their practices through customized, industry-specific planning. We have built planning tools to comprehensively answer the questions that face practice owners in today's environment. Our services are available both on a one-off basis or in the context of a full financial plan. Set up a call if you'd like to learn more about how Hayes Wealth Advisors can help you make the best financial decisions for your practice and family.