Recently, there’s been a lot of noise about the Biden Administration’s American Jobs Plan, commonly referred to as the ‘infrastructure bill.’ We’ve heard a lot about infrastructure over the few years, and for a good reason: it’s a popular issue that earns bipartisan support amongst voters. The problem has been how to do something about it.
As you know, we focus on the facts of regulatory changes that may impact your financial plan. In the case of this bill, it isn’t legislation just yet. There’s good reason to believe that many details of the bill will change by the time it’s signed into law.
That said, there are three proposed changes we’re keeping an eye on as they may be relevant to you.
Increase in the top ordinary income tax rate. Currently, the top ordinary income tax rate is 37% for individuals earning $523,600 or more, or $628,300 for married filing jointly. The American Jobs Plan proposes increasing the top tax rate to 39.6% for those earning over $400,000. We don’t know yet if the income figure is for individuals or married filing jointly.
Despite the proposed increase, this is nothing new. The United States has used a progressive tax system since the mid-1930s. Even if the top tax rate goes up, we expect our resources to address rising taxes to remain unchanged: tax-advantaged retirement plans, charitable deductions, and bunching deductions are not eliminated by the proposed legislation.
We’re watching this provision to learn more about the income figure and any additional changes that may impact potential strategies.
Change the qualified retirement account deduction. This proposed change replaces the deduction to qualified retirement accounts with a flat 26% credit. Income tax is progressive, so the value of a tax deduction rises as your income increases. For example, a taxpayer in the top marginal tax bracket receives a $37 tax benefit for every $100 contributed into a retirement account. Meanwhile, a taxpayer in the bottom bracket would only get a $10 tax benefit for the same $100 contribution.
If it passes, this proposed legislation will flatten the value of deductibility by income level. The intention is to encourage lower-income earners to save by providing the tax credit incentive. We can see Roth IRAs growing in popularity for higher earners, assuming income falls under the current limits. Under current legislation, Roth IRAs have an income cap of $198,000 for married filing jointly or $125,000 for individuals.
Decrease the gift and estate tax exemption amounts. This proposal considers lowering the unified gift and estate tax exemption from $11.58 million for individuals to $3.5 million and $23.16 million for married filing jointly to $7 million.
It’s a big bill with a lot of moving parts that are under consideration for now. We’ll keep an eye on things as they transpire and take the appropriate courses of action after the bill becomes law and the final detail are determined. Until then, if you have questions on anything regarding your portfolio or future direction, please don’t hesitate to reach out.
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