The House Ways and Means Committee just released a draft of the Democrat’s highly anticipated tax legislation.
While we’ll likely see changes to this version of the bill, I want to provide information on some of the most impactful changes – as we understand them today.
Single filers with income below $400,000 and married filers with income below $450,000 will likely see no significant impact right away.
Filers with income above $400,000/$450,000 respectively should expect higher marginal rates. The bill would bring back the top marginal rate of 39.6% on ordinary income and compress the 32% and 35% brackets.
Under current law, long-term capital gain rates are 0%, 15%, or 20%. The proposed bill would increase the top capital gains rate from 20% to 25%. While an increase, it’s a potential win for high-income earners based on President Biden’s proposal of increasing the top rate to 39.6%.
Many have been concerned about a retroactive capital gains rate. Based on the proposed bill, the current capital gain rates apply if the taxable transaction happened on or before September 13, 2021. Transactions after September 13, 2021 will use the new 0%, 15%, & 25% rates.
As of January 1, 2022, after-tax dollars in retirement accounts will no longer be eligible for conversions to Roth accounts – effectively killing the Backdoor Roth and the Mega Backdoor Roth.
Additionally, Roth conversions are scheduled to phase out entirely for high-income earners by 2031. Individuals and couples with income greater than $400,000/$450,000 will be ineligible to complete Roth conversions after the effective date.
The gift and estate tax deduction would be reduced from its current $11.7 million threshold to $5 million per person, essentially reversing the TCJA changes.
Other Notable Items
Cryptocurrency – under current law, cryptocurrencies are not subject to the 30-day wash sale rule. However, assuming this piece of the bill isn’t changed, cryptocurrency will be subject to the wash sale rule effective 1/1/2022.
What didn’t make it into this tax bill is the elimination of step-up basis or an increase/elimination on the State and Local Tax (SALT) deduction cap – though House Democrats have said SALT will likely be part of a future bill.