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How Will Tax Law Changes Affect You?

Taxes can be a big drain on investors seeking to retain or increase their wealth.  Thus, it makes good sense to have a well-thought-out tax strategy.  While Congress is still working on the details, some preliminary tax law changes for 2022 and beyond have come out in draft form.

Here is a summary of some of the key points of the proposed legislation:

  • Individual filers with income below $400,000 and Married Filing Joint (MFJ) filers with income below $450,000 will probably not see meaningfully higher taxes.
  • Taxpayers with income over these thresholds should expect both higher marginal tax rates as well as higher capital gains tax rates.
  • The highest ordinary income tax bracket may return to 39.6%. Currently the top bracket is 37%.
  • For filers over the $400,000/$450,000 thresholds, the capital gains tax rate would increase from 20% to 25%. A 3.8% Medicare surtax on high earners would boost the top rate to 28.8%.
  • The “Backdoor Roth” (the strategy of making non-deductible IRA contributions and then converting them to a Roth IRA) may be history. Same with the “Mega Backdoor Roth” strategy that can be done inside some 401k plans.
  • Roth conversions for individuals over certain income thresholds may be eliminated, but not until 2031. (Congress enjoys the tax revenue it gets from Roth conversions.)
  • The unified estate and gift tax exemption amount would be reduced to $5 million per person in 2022 from $11.7 million.
  • The highest corporate tax rate may rise from the current 21% to 26.5%.
  • The 3.8% Net Investment Income Tax (NIIT) may be applied to S-Corp distributions for taxpayers with income over $400,000 (Individual) or $500,000 (MFJ). 

Tax Planning Pays Dividends

These are just a few potential changes in the draft form of the bill.  Nothing is final, of course, until the bill becomes law.  Investors may want to start thinking now about how to position themselves for these changes, however, and not wait until the last minute.

We can help. Please let us know if you would like us to review your situation in light of the changing tax laws.

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Peter Thoms, CFA, MBA

Peter Thoms, CFA, MBA

Peter Thoms, CFA, founded Orion Capital Management LLC in April 2002. Peter has extensive experience managing investment portfolios for clients pursuing a wide range of financial goals.

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