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Proposed Tax Legislation Changes

The House Ways and Means Committee made waves Monday when it released a draft of significant tax legislation. Our GWS Planning Team spent the week dissecting these proposed changes to share a quick summary of the key points with you. We’ve already begun building some of the proposed changes into our scenario analysis tools to provide up to date “what if” illustrations reflecting potential impacts to our clients.

Below is a summary of the fundamental changes proposed, as well as related details and implications

#1: Increased Top Personal Income Tax Rate

House Democrats propose raising the top personal income tax rate to 39.6%, from 37%. That higher rate would reverse a cut signed into law by Trump. The committee also proposed a 3% surtax on individuals with an adjusted gross income of more than $5 million, an idea not included in Biden’s plans released earlier this year. However, this 3% surtax would also apply to trusts with an income of over $100,000.

The proposed top bracket would start at taxable income levels of $400,000 for single ($450,000 married filing joint); this is lower than the president’s plan previously released, which would have the top rate kick in at $452,700 and $509,300, respectively (adjusted annually for inflation).


As a result, more high-income Americans would be subject to the top rate under the committee’s proposal. The proposed effective date is for taxable years beginning after December 31, 2021.

#2: Higher Capital Gains Rate

The House bill would increase the capital gains rate to 25% from 20%. In addition, a 3.8% Obamacare tax on investment would be added on top, meaning the richest would pay a 28.8% federal rate on realized investment returns.

This proposal is lower than the 43.4% top capital gains rate previously proposed by the president for those with adjusted gross incomes exceeding $1 million ($500,000 married filing separately).


The new rate would apply to those in the top tax bracket for long-term capital gains, which in 2021 covers individual filers earning more than $445,850 and married joint filers earning more than $501,600, according to the Ways and Means Committee. The proposed effective date for a 25% capital gain rate is September 13, 2021. The proposed legislative text currently provides that any transactions completed on or before September 13, 2021, or subject to a binding written contract on or before September 13, 2021 (even if the transaction closes after September 13), are subject to the current 20% top capital gains tax rate. Any capital gains recognized after September 13, 2021, are proposed to be subject to the new maximum 25% rate.

#3: Estate and Gift Tax Lifetime Exemption

This recent proposal would cut in half the estate and gift tax lifetime exemption from the current inflation-adjusted $10 million per person ($11.7 million in 2021) to an inflation-adjusted $5 million. This provision is not included under the president’s proposal, which instead sought to reform the taxation of capital income by creating a realization event at death - removing the “step up in basis.”


The proposed change would apply to estates of decedents dying and gifts made after December 31, 2021.

#4: Grantor Trust Changes

Significant changes are proposed for the treatment of assets transferred to a “grantor trust.” Grantor trusts are trusts where the creator of the trust, the grantor, is deemed the owner of the trust for income tax purposes. In addition, the new legislation would require grantor trusts to be included in a descendant’s taxable estate when the descendant is the deemed owner. This provision was not included in the president’s proposals.


Grantor trusts are an essential and frequently used planning tool for lifetime wealth transfers. Under the proposal, assets transferred to grantor trusts would be included in the grantor’s estate for federal estate tax purposes upon the grantor’s death.

#5 Changes to RMDs, After-Tax Contributions, “Back Door” Roth IRA, and Roth IRA Conversions

This legislation would limit contributions and increase the Required Minimum Distributions (RMD) for accounts over $10 millionand $20 million.

It would also eliminate the Back Door Roth IRA strategy for higher-earning taxpayers (with taxable income exceeding $400,000 or $450,000 for joint filers) starting in 2022. Currently, taxpayers may make nondeductible contributions to a traditional IRA and then convert the traditional IRA to a Roth IRA, regardless of income level.

Furthermore, this provision would prohibit all employee after-tax contributions in qualified plans.

Finally, this bill would eliminate the ability to do a Roth IRA conversion if you have more than $400,000 as a single individual or $450,000 married filing jointly; however, this would not be eliminated until 2031.


This proposal included many changes to retirement plans for high-income earners, emphasizing eliminating the loopholes for growing IRA and Roth balances if you are over the high-income earning thresholds.

Expected Timing

Speaker Pelosi has indicated that the House plans to enact the infrastructure and the budget reconciliation bills by October 1. The bipartisan infrastructure bill has a planned vote in the House by September 27, which is the last stop before the bill goes to President Biden for signing, assuming the House passes it with no changes from the Senate version.

Congress also is coming up with several fiscal deadlines this fall, including considering a continuing resolution to maintain funding for federal departments and agencies, which is scheduled to expire on September 30.

While this is merely a proposal and may not be passed in its current form, it strongly indicates future law to come. Our GWS team will watch this legislation as it works through Congress and update you on any relevant planning considerations during the upcoming months. In the meantime, feel free to reach out to your lead advisor with any questions or concerns.



Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance references are historical and are no guarantee of future results. In addition, all indices are unmanaged and may not be invested directly.

Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

The opinions in this material do not necessarily reflect the views of LPL Financial.

LPL Financial does not provide tax advice. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

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