Biden’s Tax Proposal: What Does It Mean For You?  

On September 13th, Democrats on the House Ways and Means Committee released their highly anticipated, and speculated, proposed tax changes. It’s unclear how they will ultimately shake out, as Democrats need almost every vote they have to advance the changes. Regardless, the proposed measures are quite different from what many anticipated.  

It’s also not out of the question for additional provisions to make their way in, like an expanded deduction for state and local taxes (SALT). While the current version of the bill may not be in final form, many of its features are likely to become law, set to go into effect in the new year. 

While the proposed changes are vast, we’ve narrowed the focus here to four main areas, which are most applicable to Uplevel clients. 

 

Higher Ordinary Income Tax & Capital Gains Rate

The highest tax brackets are changing… again. In 2018, the top federal rate income tax rate was reduced to 37%. Rates are  now potentially reverting back to former top rates of 39.6%, which would be ‘permanently’ reinstated beginning in 2022. 

That’s not all. The highest tax brackets will also be substantially compressed – meaning you hit higher tax rates at much lower incomes. Those earning $400,000 to $450,000, depending on filing status,will see the largest average increase in tax liability of 4.6%, as today’s 35% bracket becomes 2022’s 39.6% bracket.  

Those affected by the new rate will also see fewer deductions in the tax code today than previously, making their effective tax rate higher. It also appears that all ordinary income brackets are indexed for inflation, except the top brackets of $400,000 for single filers and $450,000 for married filing joint. 

The top long term capital gains rate is also set to increase 5%, from today’s 20% to a new 25%, again impacting lower income thresholds of $400,000 for single filers and $450,000 for married filing joint. The cherry on top would still be the 3.8% Medicare surcharge that some filers are already accustomed to. 

The proposed long term capital gains rate changes leaves little room for planning, as Congress isn’t waiting until the start of the new year. Rather, increased rates would be retroactive to September 14, 2021. If you sold appreciated securities prior to this date, the top rate would be 20%. A day later, you’ll pay an additional 5%. It’s also likely that year-end capital gains distributions from mutual funds and ETFs will be taxed under the new rates.

You may be thinking what we’re thinking – thank goodness we’re not tax planning software coders right now. 

What strategies, if any, can you employ if these bumps apply to you? High earners may want to accelerate ordinary income in 2021, prior to the rates increasing. The folks that would most likely benefit the most from this strategy fall into the compressed brackets, where they would move from 35% to 39.6% in 2022, instead of 35% to 37% in 2021. 

Additionally, high earners who are charitably inclined could consider postponing charitable donations to next year, when the associated tax deduction would be more beneficial.

 

Elimination of Backdoor Roths

A previously little-known strategy high income earners have used for years is likely on the chopping block, beginning in the new year. 

Earners who exceed income limitations for contributing directly to a Roth IRA have an alternative route: open a traditional IRA, make a $6,000 contribution (if under age 50), and convert it to a Roth IRA shortly thereafter. In doing so, there is likely little tax on the conversion, and it allows the money to grow tax free in a Roth. 

There’s more. In what’s often referred to as a “mega-backdoor” conversion, participants in 401(k) plans that allow after-tax contributions have been able to sock away as much as $58,000 a year into a 401(k) and then convert a good portion to a tax-free Roth account. 

Not anymore. The legislation would prohibit conversions of after-tax dollars in retirement accounts, including IRAs and 401(k)s. 

The upshot? If it’s been a part of your financial plan to date, then do it while you still can. A word of caution: it can get tricky, so it’s best to work with a planner or tax professional.  

 

Estate Tax Exemption 

Roughly four years ago, the estate and gift tax exemption was doubled and indexed for inflation, bumping this year’s exemption to $11.7 million. The proposed bill reduces the exemption back to about $6 million for 2022, again indexed for inflation. The top estate tax rate remains at 40%. 

What hasn’t found its way into the bill yet is an elimination of the step-up in basis at death, benefiting people well below the 1 percent. Think of grandma or grandpa passing away, leaving you with a home they bought for $100,000 that’s now worth $1,000,000. Without a step-up in basis, you could be looking at hundreds of thousands of dollars subject to capital gains tax.  

Estate planners have been busy helping affected clients use this year’s $11.7 million exemption to give money to heirs without fear it will be clawed back, as well as addressing additional proposals to clamp down on various types of grantor trusts

Before rushing to make drastic changes to your estate plan or irrevocable gifts to family members before rules potentially change, it’s important to ask yourself if these moves align with your long term intentions or are worth the increased complexity and cost.

 

Extension of Child Tax Credit 

Under proposed legislation, the current expanded Child Tax Credit is extended through 2025. 

For many families, these prepayments could trigger additional tax owed come next spring. They are based on your most recent tax return, which for many is 2020. If your income has risen this year or you have other applicable changes, you may have to pay back some or all of the prepayments. 

 

Uplevel Can Help

While much still remains unclear, chances are likely lower tax rates, in addition to some popular tax loopholes, are coming to an end. Uplevel can help you navigate the new rules and work with your tax and estate planning professionals to make adjustments to your plans. 

We’ve already gotten to work, proactively contacting clients who are affected. We’re here to help. 

3 Ways to Uplevel Your College Planning

THERE’S NO SINGLE, right way to legally crack the college admissions and financial aid systems. It’s up to teenagers and their parents to do the necessary work.

Still, it helps to have a tour guide—which is what you get with The Price You Pay for College, the new book from New York Times financial journalist Ron Lieber. Lieber’s book discusses why college costs so much, digs into the allure of elite schools, uncovers hacks that may not really be hacks, and talks about how to plan and pay for college. Here are three key ideas that I took away from the book:

1. Families need to talk. Teenagers and their parents should discuss money, core values and priorities. That’ll help students identify what they want from their college experience.

Sprinkled throughout Lieber’s book are thought-provoking questions. For example, what’s your definition of success? What is college for? Is it about learning? Building connections? A means to a job? If a college education is a means to a job, at what price? What can the family afford? Where will the necessary money come from?

If the value of a college education to your family is a job, you might wonder just how important an elite school is for obtaining a more coveted position. Lieber’s research suggests it’s not as critical as you may imagine, with alumni from top schools obtaining between 13% and 58% of prestigious jobs, depending on the occupation. What’s apparent is the benefit of the doubt accorded to applicants who have the most selective schools on their resume. Certain gatekeepers have a vested interest in continually building and promoting their own networks, which can often start with their alma mater.

Lieber doesn’t pretend to have a formula that calculates the actual value of any given college experience. Instead, he encourages us to reflect on how our feelings influence such an important and expensive decision. In his decades of reporting, Lieber “has never come across a consumer decision that inspires more confusion and emotion than this one.”

2. The devil is in the details. Once you outline what you’re looking for from the college experience, start digging for data. Lieber’s book offers resources to help uncover the data that does exist. One problem: The numbers aren’t standardized across schools and aren’t always easy to come by or interpret. For example, mental health is becoming more top of mind for many families, with nearly a quarter of new undergraduates now classified as disabled, largely due to a mental health diagnosis such as depression or anxiety. Campus resources may be very important to these families, so it’s worth determining how long it takes to schedule an appointment for counseling, who the providers are and what type of support organizations are available.

The clearer you are on what success means for your child and family, and what value a college offers, the more you can cut through the clutter and eliminate details that aren’t a priority. In a decision that’s anything but easy, the more noise you can eliminate, the better.

3. The game has changed. It’s probably not that surprising—and yet still alarming—to learn that consultants play a big role behind the scenes. They help colleges to find students, to determine what to charge them and to prod families to follow through. Discounts to attract students are often offered in the form of merit aid.

It’s tough to understand the financial aid system, let alone predict how much merit aid you’ll receive—assuming, of course, you get in. Merit aid doesn’t consider your financial situation, like need-based financial aid does, so it’s entirely possible for wealthier families to be offered discounts, provided the student has what the college is looking for. Colleges use algorithms to predict what kind of discount is needed to get a particular student to say “yes.” This is all guided by consultants, who “help schools leverage information about your family to optimize your discount,” Lieber writes.

He gives us valuable hints about how to uncover more about merit aid than the basic information listed on a school’s website, and it starts with a school’s Common Data Set. The easiest way to find this information is by Googling “common data set” and a college’s name. Among other items, look for the number of people who received merit aid, despite no financial need, and the range of test scores for admitted students. If your student’s scores rank high for a particular college, there’s a greater chance of merit aid. Schools claim their award-giving process is based on more than test scores and other data, and it likely is. Still, checking the numbers gives families a shot at determining how a college’s algorithm is likely to rank their prospective student.

Want to talk more about your specific situation? Reach out to us today.

This article first appeared in HumbleDollar.

 

 

Did You Receive a Child Tax Credit in July? Here’s What You Need to Know

You may have noticed an unexpected deposit in your bank account (or check in your mailbox) last month from the Federal Government — the first installment of six advance Child Tax Credit payments to come. Congress increased the credit from its previous level of $2,000 per child to a maximum of $3,600 per child. 

Key takeaways of the Child Tax Credit:

  • The increased Child Tax Credit amount is only for 2021 and advance payments will only be made through December, so be prepared for deposits to stop January 2022.
  • The amount of Child Tax Credit your family receives is based on the number of children you have, their ages, and your income.
  • Be aware that the Child Tax Credit may impact your taxes when you file in 2022, potentially reducing your refund or increasing the amount of tax you owe. 

Tax credits for families with children are nothing new, but this year’s advance payments have some unique nuances. 

Families can expect to receive five more payments before the end of the year, which represent half of the estimated total credit owed. Any remaining credit will be determined once taxes are officially filed for 2021. Payments are being sent to the bank account on record with the IRS (where your refunds have been sent) or mailed if an account is not on file. 

 

How was my Child Tax Credit calculated?

The first consideration is a child’s age, with each child 5 and under eligible to receive a maximum tax credit of $3,600, and children ages 6-17 receiving up to $3,000. 

Here is how this breaks down:

  • A monthly payment could be as much as $300 for a child 5 and under ($3,600/2 = $1,800, split into 6 equal payments of $300) and/or
  • $250 for children ages 6-17 (same calculation using a $3,000 maximum credit).  

 

Why was the Child Tax Credit I received so much smaller?

The Child Tax Credit is subject to income phase outs, meaning higher income households could receive reduced payments or none at all. The estimated payments are based on household income reported on the most recently filed tax return. 

There are two levels of phase outs based on income–the first can reduce 2021’s “special” one-time Child Tax Credit and the second can reduce the regular $2,000 Child Tax Credit. The phase outs can be confusing, so here’s a breakdown:

 

Filing Status MAGI Subject to Phase Out 1 (additional 2021 credit) MAGI Subject to Phase Out 2 (regular $2k credit)
Single $75,000 $200,000
Married $150,000 $400,000
Head of Household $112,500 $200,000

 

Each phase out level reduces the Child Tax Credit by $50 for each $1,000 by which income exceeds the threshold for a given tax filing status. For example, a married couple earning $250,000 would probably not receive any additional Child Tax Credit for 2021 but would still qualify for the regular $2,000 credit, receiving a portion of it through upfront payments.

 

Is the Child Tax Credit going to impact my taxes?

Because the Child Tax Credit is an estimated upfront payment, you may be in for a surprise when it comes time to actually file your 2021 tax return. 

If this year’s income ends up higher than 2020’s, you could end up paying back some or all of the credit when it comes time to file, resulting in a smaller refund than expected or even owing money to the IRS. 

The converse also holds true. If you experience a drop in income this year but receive a smaller Child Tax Credit based on 2020’s higher income, you’ll receive a larger credit amount when tax time rolls around.

For many families, income levels for the remainder of the year may still be unclear. If you’re concerned about potentially exceeding last year’s levels and want to minimize the risk of a surprise at tax time, we recommend opting out of Child Tax Credit prepayments. 

To opt out, use the IRS’s Child Tax Credit Portal, which involves setting up an online account with the IRS and verifying your identity. Be prepared — the process requires uploading a copy of your driver’s license or passport and can be rather glitchy. Also, if you are married, both you and your spouse will need to unenroll from advance payments to shut off the tap completely. 

 

Help for Families

With nearly 1 in 7 children in the U.S. living in poverty, this year’s increased Child Tax Credit will be a lifeline for many struggling families. For those in a more fortunate position, having an understanding of how you might be impacted and the steps you can take to avoid a surprise at tax time is valuable. 

Want to talk more about your specific situation? Reach out to us today.

 

Three Tips for Anyone Thinking of Quitting Their Job

Before the pandemic, many professionals believed working remotely would help them find more balance. They craved increased autonomy, believing it would help provide renewed zest for their professions and lives.

Then came the pandemic and the realities of remote work. For some people, it wasn’t as glamorous as it sounded. They’re hardly alone. In fact, many professionals are now quitting their stable — but stressful — jobs in favor of pursuing other opportunities, self-employment, starting businesses, or even early retirement and travel.

If you’re among them, consider three things before making your next move, found in Anika’s full Business Insider article.

Possible Tax Changes Ahead – Make a Move or Sit Tight?

During last year’s Presidential campaign, then-candidate Joe Biden ran on a platform of expanded social programs paid for, in part, by proposed tax increases on wealthy Americans. The American Family Plan announced at the end of April would expand paid family leave, increase access to childcare and prekindergarten education, and make community college tuition-free.

Funding for these programs would be met by sweeping reforms to current tax law, including an increase in top capital gains and income tax rates plus adjustments to rules surrounding inherited assets. Given these potential changes on the horizon, how might you and your family be impacted and should you take action today? Let’s first take a look at some of the proposed changes:

 

Capital Gains Rates
Under current tax rules, the sale of an asset, such as a stock or mutual fund, real estate, and even collectables like coins or jewelry are subject to tax on the gain (less exemptions for certain real estate transactions). Federal long term capital gains rates range from 0% for those in the lowest income tiers to a maximum of 20% plus a 3.8% Medicare surtax for the highest earners. Under the proposed plan, households with incomes greater than $1 million in a given year would pay an increased capital gain rate of 39.6% plus the 3.8% Medicare surtax for a total rate of 43.4%. Taxpayers would also be on the hook for any state or local taxes, depending on the rules of their resident state.


Marginal Income Tax Rates
The Tax Cuts and Jobs Act (TCJA) passed by former President Trump in 2017 reduced the top Federal tax rate for earned income to 37%. President Biden’s plan would restore the top rate to its previous level of 39.6%, in addition to levying payroll taxes on individuals with incomes over $400,000 per year. It would also cap deductions for high income earners, limiting what can be written off on tax returns.


Step-Up in Basis
Individuals who inherit assets currently receive a “step-up” in basis to the fair market value of the asset as of the date of death of the original owner, meaning heirs only pay tax on any appreciation enjoyed between when the assets were inherited and later sold. To discourage people from hanging on to appreciated assets until they die and escaping taxation on the appreciation, President Biden’s proposal would eliminate the step-up in basis and tax inherited assets as if they were sold at the original owner’s death, after applying a $1 million exemption per individual.


What does this mean for you?
Though the vast majority of Americans will not be impacted by these proposed changes, individuals with appreciated investments or real estate may face a much larger tax bill than expected when it comes time to sell or pass down assets. As tempting as it may be to get ahead of potential tax increases in an attempt to “lock in” today’s lower rates, it’s important to remember there are many unknowns that lie ahead as the American Family Plan works its way through Congress.

Instead of making drastic moves today based on what might happen in the future, now is a great time to revisit your plan for appreciated investments, the timing of income, and intentions for passing assets to heirs.

Want to talk more about your specific situation? Reach out to us today.

Women Have What It Takes to Buy a Home in Today’s Hot Market

In today’s competitive real estate market, it takes more than just money to claim the keys to the hot property everyone wants.

“From understanding purchaser responsibilities to realistically assessing risk tolerance, savvy buyers best navigate fast-paced bidding wars,” says Carey Hughes, principal broker with Keller Williams Realty Professionals in Portland, Oregon.

This holds true for would-be homeowners across the board.

But as more women take the lead in purchasing homes, they face an uphill battle getting there.

To read more, check out Anika’s full Business Insider article.