New Tax Plan Proposals

Since the transition of power in Washington, the new administration has outlined a strict American families plan on April 28, 2021. The main focus of the tax plan is to extend tax breaks, part of the American Rescue Plan Act, for lower and middle-income taxpayers.

The tax breaks would be paid for by those making $400,000 or more per year. Some Democrats want to add their provisions to the plan. However, the new addition of requirements is not going to attract Republican support.

If you were wondering what the American Families Plan consisted of, then you came to the right place. But, first, we'll go over some of the new proposals enacted, how you can take advantage of reducing your tax liability, and ways you can take advantage through the new proposal.

 Increasing the Top Individual Tax Rate

 

 

The new administration specifically mentioned that they would not raise taxes for those earning under $400,000. In the current time, single filers who make over $400,000 fall both into 37% and 35% tax brackets.

It's not so clear whether the new tax bracket of 39.6% would start at $400,000. However, according to CNBC, "the 39.6% top rate would kick in during the 2022 tax year, according to Biden's proposal. Congress would still need to pass legislation enacting the policy which isn't assured."

If you're earning over $400,000 or a married couple making over $509,300, there are specific strategies to implement to minimize the rate impact.

 Strategy to Minimize Tax Liability

One strategy to implement is to accelerate your income into the current year, such as converting your traditional IRA to a Roth IRA.

Asset held in traditional IRAs have several disadvantages, which are listed below:

• Distributions above the basis are taxable as ordinary income.
• RMD (or required minimum distributions) commence once a taxpayer reaches 70.5 years of age.
• Early removals before age 59.5 are subject to a 10% fine.

Now, suppose you convert to a Roth IRA. In that case, you'll speed up the ordinary income tax liability that would otherwise be due upon distribution had the assets stayed in the traditional IRA.

Honestly, think about whether converting to a Roth IRA fits into your long-term tax strategy. At Mark Cherry, CPA, we help our clients with IRA tax strategies. So schedule a call to get started.

 

Increasing Capital Gains Tax Rate for the Wealthy

 

 

The new administration wants to raise the capital gains tax rate for those earning $1 million or more from 23.8% to a whopping 39.6%. The hike represents a significant increase if the plan goes through. 

Strategy to Minimize Impact

Suppose you want to avoid the capital gains tax hike. In that case, you can consider accelerating realized capital gains before the effective date of any change or postponing realization after the effective date longer than they might have done.

We're not financial advisors at Mark Cherry CPA. However, if you were to sell your assets before the effective hike takes place, you'll be paying a lower tax bill.

A Break For Lower to Middle-Income Taxpayers

The biggest news of the Biden proposals is the tax break for lower to middle-income taxpayers. In addition, the American Rescue Plan enacted helps boost the following tax credits:

• Child tax care credit
• Child and dependent care credit
• Earned income tax credit
• Health insurance tax credits
• Premium tax credits under the affordable care act

For example, the child & dependent care tax credit is for families and individuals who care for their child and dependents. Before implementing the act, families with an income of $15,000 or less can claim 35% of care expenses for a child under 13 qualifying dependent. Also, families could claim $3,000 in dependent care expenses for one child/dependent. 

With the new proposal, Biden is enacting, the changes made to the child & dependent care tax credit consists of the following:

 

• It makes the child & dependent care tax credit fully refundable
• Increases the number of eligible qualifying expenses to $8,000 for one child or dependent
• Allows for families earning up to $125,000 to qualify for the full 50% credit, making the credit worth up to $4,000 for one child/dependent

The better news is that the American families plan would extend the Child Tax Credit through 2025.

Wrap Up

 

The proposal that's in the works has a democratic majority throughout the senate. So even if the American Families Plan approves, there'll be changes to try to win the support of Democratic lawmakers.

Most experts believe the proposal won't pass until August 2021. The blueprint does not have a set date to when these proposals commence; however, the extension of the lower and middle-income tax breaks would be effective starting in 2022.

Are you looking to lower your tax liability and abide by the new tax law implementation?

Mark Cherry CPA, LLC has you covered! We are devoted to staying abreast of the most recent tax law changes and implementations. 

Please schedule an appointment to talk to one of our qualified accountants.

---