How the American Families Plan May Change Your Taxes
With any change in administrations come changes in taxes. The recently proposed American Families Plan proposed by Democrats brings sweeping changes meant to increase taxes on higher-income earners. Although the biggest changes affect earners in the top tax bracket, everyone considering saving extra during taxes should make note of the changes in case it becomes legislation so money can be saved accordingly.
The new changes to the tax code are meant to increase taxes on the top earners through a variety of different methods. Perhaps the biggest change is a proposed income tax increase of 39.6% from the 37% it stands at now. This increase was meant to match an equivalent 39.6% capital gains tax for top earners but this was reduced to a maximum of 25%. While this initially seems like a benefit for income earners in this bracket it comes with a caveat. This being that the capital gains brackets now match with income brackets. In short, single filers who earn more than 400k annually or 450k jointly pay the same rate as multimillion-dollar income earners. So, consequently, while top income earners are hit harder with these changes the mega-wealthy may end up saving extra. Another strange quirk of this proposal is higher-earning partners may want to consider staying single to avoid this threshold.
Other proposed changes will affect retirement accounts and contributions. Again this proposal was meant to prevent the more affluent from storing away money from taxation but it goes about it in an unusual way. Perhaps the most surprising of all is that there are no longer any Roth conversions available for anyone with an AGI above 400k or a joint AGI of 450k. There are also no longer any accepted contributions for those who already have retirement holdings valued at 10 million dollars. Although this may seem initially quite restrictive it doesn’t prevent anyone from still making contributions to other retirement accounts such as a 401k or a pension. Another major change to IRAs is a drastic change in the amount of stake one can invest in private companies. The current law states that one cannot invest IRA money into a private company they own more than a 50% stake in. The new legislation drastically lowers this percentage to just over 10% meaning those with self-guided IRAs will have to radically change their investment strategies to meet the new code.
Another important change to take note of is for anyone who uses S-corps. While these profits are currently subject to employment or net investment taxes the proposed change would bring an additional 3.8% surtax for the highest earners. This change doesn’t just affect S-corps but trust funds as well valued at 100k or more.
Like all proposed pieces of legislation, the changes to code aren’t guaranteed until they become law, and with Democrats leading with only a narrow margin of votes, compromises could still be made. Those with high income generated from earned wealth i.e. salaries and wages should certainly be on the lookout for ways to save and diversify their assets in new ways. One major benefit does come to everyone in the form of increases in child credit and adjusted brackets should shoulder the taxes of more middle-class earning single filers and families.
