How Might the Home and Biden Tax Proposals Have an effect on You? What Ought to You Do Earlier than 12 months’s Finish?

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Have you been hearing a lot about the tax proposals coming out of Washington D.C.? First it was President Biden’s back in April. In early September, it was the House Ways and Means Committee’s. And currently, as of the time of publishing, the tax proposal situation in Congress is anybody’s guess.

[Meg’s note 11/5/2021: The recently released Build Back Better Act basically eliminated all the tax proposals listed below except that the wash sale rule will still apply to cryptocurrencies. So, a whopping 1 day after publishing this post, it seemed almost entirely moot.

And just a few days after that, the new new tax proposal came out, that reinstated the elimination of backdoor Roth contributions/conversions but did not reinstate tax rate increases. Which is all to say, Who The Heck Knows what’s going to happen. This has been like whiplash and the safest thing to do now is just Wait Until It (Something) Becomes Law.]

These tax proposals include some really big changes. Like, M.A.J.O.R.

When I think about our community of women in their early to mid career in tech, I realize that, thankfully, many of these changes won’t affect you. You can ignore them.

But there are some proposed changes that might affect you. And significantly.

We want to make sure you know both how you might be impacted and if there’s anything you can do to minimize an increase in your taxes.

Now, if you’re like me, I think taxes are good. I agree with the notion that we should give the government money so that they can provide services to people who need them. I love roads! National Parks! Firefighters! Schools! And I want people in need to have Food stamps! Housing! Medical care!

That said, as a financial advisor who is bound by the fiduciary standard (which says, in layman’s terms, that we have to always put our clients’ interests ahead of my own), we are obligated to figure out how to best help our clients…and now you get to benefit from that same effort.

Before we jump in, let me remind you that these are still proposals. They are not law. They might become law. But they also might not. You don’t want to do anything foolish to protect against changes that might never come to pass.

Below we lay out some of the most meaningful proposals for women in tech, how they could impact you, and what you might do—if anything—in response. And, please, remember, this blog post is for the entire internet, not for your specific circumstances. Because we don’t know your specific circumstances.

[Meg’s Note #2: And thank you, Maddie Burton, CFP®! Just so credit gets laid at the proper feet: Maddie did the lion’s share of work on this tax proposal hoo hah for our clients. But she’s so busy preparing for our Fall meetings with clients that she didn’t have the time to write this post and claim all the credit for herself!]

Backdoor and Mega Backdoor Roth Contributions Prohibited

Roth conversions of after-tax funds in retirement accounts would be prohibited for all taxpayers starting January 1, 2022.

Say what?

Have you ever made a “backdoor” Roth IRA contribution? Or have you been making after-tax contributions to your 401(k) and converting the contributions to a Roth account (either within the 401(k) or an outside IRA)? Well, buh-bye to those tactics.

Which is too bad (from our clients’ perspective), ‘cause that is a sweet way to get a lot of money into a forever-more-tax-free account. And when you’re 35, “forever more” is a long freaking time for investments to grow.

Possible action by end of 2021: Contribute and convert (the conversion is the important part!) as much after-tax money into Roth accounts as possible, via backdoor Roth IRAs and mega backdoor Roth 401(k)s.

Even if this proposal doesn’t become law, Future You will benefit from your extra tax-protected savings this year.

Roth Conversions Prohibited

All Roth conversions would be prohibited for taxpayers in the highest ordinary-income tax bracket, starting January 1, 2032, even on pre-tax dollars. In these proposals, “the highest ordinary-income tax bracket” applies to you if you have a total income over $400k (single) and $450k (joint).

(The backdoor Roth prohibition we mention above is specific to converting after-tax dollars in an IRA or 401(k).)

What is a Roth conversion? It means moving money from a pre-tax IRA or 401(k) into a Roth IRA or Roth 401(k) and paying ordinary income tax on that money in the process.

Why would you do that? Ideally, because you are in a low-income/low-tax-rate year, and so the income tax hit would be low…and now all that glorious money is forever-more tax-free. Reread above about the glory of tax-free-ness when you have 7 (or heck, even 2) decades left to go.

Possible action by end of 2021: Nothing! Even if this proposal becomes law, you’ll have ten years to address it. I mean, if this year is a particularly low income/low tax rate year, then you might want to consider converting. But that has nothing to do with the imminent tax law changes and it’s just regular ol’ annual tax planning.

Income Tax Rates Going Up

The top marginal ordinary income tax rate would return from 37% to 39.6% for incomes over $400k (single) and $450k (joint). (“Return” because the top tax rate was 39.6% as recently as 2017. I hope the fact that we had this tax rate so recently gives a healthy perspective on this potential increase.)

Also, that highest tax rate starts applying at a lower income threshold. In this tax year, that top 37% tax bracket starts at a higher income level $518k (single) and $622k (joint). In practice, this means that more of your income will be subject to a higher tax rate.

Possible action by end of 2021: If you expect that you will already be in the highest tax bracket next year (at least 37%, 39.6% if the laws change), then, if you can:

  • Bring some of that income into 2021, where it will be taxed at a max rate of 37%, not 39.6%. You can’t move your salary or your RSU vesting schedule; you can however:
    • Consider exercising NSOs in 2021 instead of 2022.
  • Push deductions into 2022. Many of your tax deductions are immovable, realistically.
    • The easiest way to do this is to delay charitable donations until 2022.

But if you’re not pretty sure you’re going to be in the highest tax bracket next year, it’s tricky. You don’t want to bring income into 2021 and increase your tax rate; if the tax proposal doesn’t pass, you might have just bought yourself an unnecessarily higher tax bill. This one is best discussed on a case-by-case basis.

Long-Term Capital Gains Tax Rate Going Up

The top long-term capital gains rate would increase from 20 to 25%, for incomes over $400k (single) and $450k (joint), effective as of the date the House proposal was released (i.e., retroactive to early September).

Biden’s proposal (retroactive to April) would raise the capital gains tax rate to 39.6%…but only for people with $1M+ of income. The House proposal increases the rate less, but it applies to many more of you. There seems to be a general feeling that, if either of these passes, it’ll be the House’s.

Possible action by end of 2021: If this passes as-is, there’s no planning to be done; the effective date has already passed. If any part of it changes, like the income threshold it applies to or the effective date, then maybe there’s something to be done by year’s end.

The best I can say is, if you were already planning to sell an investment at a gain—and therefore be subject to the long-term capital gains rate—consider selling it in 2021 instead of 2022. Maybe the gains will end up being subject to the current, lower tax rate.

Coordination with a good CPA (good luck finding one at this point in the year! Those poor souls have been slammed continuously since late 2017, it seems) would be very very helpful.

Gift and Estate Tax Exemption Levels Decrease

The estate and gift tax exemption would return to $5.85M per person and $11.7M per married couple. (“Return” because those levels were in effect as recently as 2017.) This would be a reduction of 50% from current levels, effective January 1, 2022.

When you die, if your estate (very basically, the value of everything you own) exceeds that number, everything above that number is subject to an estate tax.

Possible action by end of 2021: If your wealth isn’t close to this level (and isn’t likely to be), there’s probably nothing to worry about. Even if you did or could have this much money, at your young age we can’t reasonably predict how much “excess” wealth you’ll have.

Generally, we don’t recommend giving away much money preemptively, as you might end up needing it! Any work here would require coordination with an estate planning attorney. Even if the proposal passes and you end up wealthier than you expected, you can still do useful work in 2022 and beyond.

Wash Sales Rule Applies to Cryptocurrencies

The wash sale rule would now apply to sales of cryptocurrencies.

What does that even mean?

If you sell an investment after it grows in value, you have a gain, and you pay taxes on it. But if you sell other investments at a loss, those losses can offset the gains and reduce your taxes owed.

The wash sale rule prohibits you from using a loss in that way if you have bought and sold the same investment within 30 days. So, if you:

  1. Buy a stock for $50 on Day 1
  2. Sell it for $20 on Day 100
  3. Buy it back for $20 on Day 101

you cannot use that $50-$20 = $30 loss now to reduce your taxes. (You can use it in the future; the tax benefit is delayed, not lost.)

Up until now, you could buy and sell cryptocurrency whenever you wanted and use losses regardless of timing. Starting in 2022, you’d be subject to wash sale restrictions.

Possible action by end of 2021: If you own cryptocurrency that has lost value since you bought it, consider selling it now. If you want to still own the same amount, then repurchase the same amount of cryptocurrency immediately afterwards. You can claim the loss on your taxes for 2021. Also, WORK WITH A CPA.


As always, this caveat applies: don’t let the tax tail wag the everything-else dog.

Tax considerations (particularly ones that might not even become law!) are always secondary to sound investment decisions, and to the broader panorama of the life you want to live.

Do you want to work with a financial planner so you don’t have to figure out byzantine tax changes yourself? Schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

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