There has been a lot of talk about the recent proposed tax law changes by the Biden administration. Although there has been much talk over the last year of what this will specifically look like, the fact is that there has been, and are proposals that will be subject to political battle.

Thus far, I have not made any effort to discuss these proposals. But, after a much watered down look, the tax law changes are becoming more likely to be accepted and approved. It seems that we are at a point that its worth having a conversation.

All of these proposed changes would go into effect after December 31st, 2021, except for one of those changes listed below.

The first thing my real estate professional clients must know is that all of these changes really revolve around who the Biden administration deems “high income earners”. This has a couple of different income level thresholds, but for the most part it’s the following:

“High Income Earners” – The Top 2% of Taxpayers

$400,000 Single Tax Filers

$450,000 Married Filing Jointly Tax Filers

The style of this blog post is going to be a bit different, in that I’m just going to break down a few of the crucial proposed tax changes that could specifically affect high income earning real estate professionals. There is much more in the proposal, but these are the segments that are geared towards this audience.

Top Federal Tax Bracket

• Moving from 37% to 39.6%

Long-Term Capital Gains Tax Rate For Individual Taxpayers

• Single tax filers: Moving from 15% to 20% for those with income above $400,000
• Married filing jointly tax filers:  Moving from 15% to 20% for those with income above $450,000

This next section I have written about in a previous blog. Many self-employed individuals, including real estate professionals, form an LLC for their realty business and file as a S-Corporation. The purpose of doing this is because you can pay yourself an ordinary wage or salary, and then pay the rest of your income (profit) out as a dividend. This allows the “profit” portion to avoid self-employment taxes.

Here is the current administrations’ response to this tax avoidance:

Net Investment Income Tax (NIIT) on S-Corporation Profits

• Single tax filers with MAGI (Modified Adjusted Gross Income) above $400,000 will pay an additional 3.8% on all of those “profits” avoiding self-employment tax
•  Married filing jointly tax filers with MAGI above $500,000 will pay an additional 3.8% on all of those “profits” avoiding self-employment taxes

Qualified Business Income (QBI) Tax Deduction

• Single tax filers will have a phase out of the 20% QBI deduction after MAGI above $400,000
•  Married filing jointly filers will have phase out of the 20% QBI deduction after MAGI above $500,000 

ROTH IRA Conversions

• ROTH IRA conversions will no longer be allowed for “high income earners” with the levels previously discussed AFTER the year 2032
• FYI- This is the only tax law change happening after January 1, 2022. With the large stimulus injection into the economy, the thought is they need taxes to cover those injections. The IRS likely wants to give time to incentivize high income earners to take advantage of converting their retirement dollars. When converted to ROTH, those funds are taxed.

Back Door ROTH IRA and Mega ROTH

•  Will no longer be permitted 

Gift Tax Exclusion

• The gift tax exclusion will revert to previous in-law levels of roughly $6 million for single tax filers and $12 million for married filing jointly tax filers 

There are some other proposed tax changes that could be relevant to some, but not to others, so I won’t refer to them here.

SHOULD YOU BE MAKING CHANGES TO YOUR FINANCIAL SITUATION NOW? 

Short answer: not necessarily. Although these watered down tax law changes (at least from the original proposals) are more likely to pass, we still don’t have a definitive answer.

But, do I think you should be considering making some changes and beginning those conversations with your financial planner, accountant, and attorney??

Absolutely!

It’s never too early to start financial planning, especially when it means you could be giving away too much of your hard-earned money unnecessarily.

If you have any questions or want to go through your specific financial situation, don’t hesitate to reach out. I’m happy to assist.