September 13th, the Democrats came out with the new tax plan for 2022. A lot of significant changes that affected a lot of our clients in a number of different ways. As the conversation has evolved, this plan has pretty much completely fallen into disarray. So what’s left? What do we need to worry about?
The original September 13 plan had a number of provisions: a new higher tax bracket, 25% capital gain, qualified business income rules, a high MAGI surtax, refundable tax credit, backdoor Roth elimination, grantor trust elimination. Now, where are we? There’s a certain amount of doubt. I get emails from CPAs almost every day, and it really depends on who you talk to, what was posted, where and what can still be negotiated.
But there’s three things that definitely appear to be surviving. For those whose modified adjusted gross income is an excess of $10 million, there’s a new tax bracket of 5%. Regardless of ordinary income capital gain, doesn’t include deductions. And another 3% over 25 million. And of course, most people are saying, okay, and that affects me because of what? Well, usually this is going to affect business owners. They may not be used to that kind of an income, but when they sell their business, that’s a capital gain. If that capital gain is over $10 million, then they may well end up with that 5% surcharge.
The next tax is the NIIT, the net investment income tax, that’s going to be applied to S-corp profits for people with a MAGI greater than $500,000 joint, $400,000 single. That there will be a phasing component, but this surtax, which is essentially a Medicare surtax is going to result in questions regarding, should you have an S-election on an LLC? That’s a conversation a lot of business owners who have companies with an income in excess of $500,000, lot of professionals, will want to talk to their CPA about.
And the third thing that’s definitely looking like it’s sticking at this point, is this qualified small business tax treatment. Now this is probably one of the best deals that almost no one knows about. It really applies to C-corps that have been held for 10 years. If you owned a C-corp for 10 years, the first $10 million of capital gain, and the value of that corporation, if you sell a company was excluded from tax a hundred percent. Almost nobody knows about this deal. It’s a very small subset of company owners that apply because C-corp’s are somewhat out of favor right now. But now that has been reduced back to the more traditional 50% of that first $10 million.
So those are three very esoteric rules. They all apply, essentially, to small business owners. And if you’re a small business owner, the tax plan still should have you very concerned.
Now, some of the other deals we don’t know, I mean, they’re still going back and forth. My rule of thumb is if you’re in a planning strategy that may or may not be urgent anymore, but it makes sense either way, then keep going. If it’s no harm, no foul, then keep doing it. A lot of people are moving that large estate tax exemption into a grantor trust if you qualified for it and it made sense, it still makes sense. We don’t know if the urgency still exists, but the growth within that grantor trust going forward will still add value.
Same with backdoor Roths. We don’t even know if the mega back Roth is going to survive or not. Looks like that issues off the table, but is still under negotiation. If it doesn’t hurt to do it now, then do it now. Take the risk off the table. If you got any questions about this or any other advanced planning items, please feel free to call us. We wish you the best of investment success.
Wong, Cristina Marcos and Scott. “House Sets up Friday Votes for Biden Agenda.” TheHill, The Hill, 5 Nov. 2021, https://thehill.com/homenews/house/580208-house-sets-up-friday-votes-for-biden-agenda.
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.