Tax Law Proposal: What You Need to Know | Financial Planning Chapel Hill l Old Peak Financial Advisors

Tax Law Proposal: What You Need to Know

September 17, 2021

2021 Democratic Tax Proposal

Tax Law Proposal: What You Need to Know

September 17, 2021

Democrats released their proposed tax bill on Monday, Sep 13. It would impose smaller tax increases than had been rumored, but there would be meaningful changes. There are a few surprises, especially to rules around Roth IRAs. We have summarized the proposal below. These changes are not guaranteed to become law, but our understanding is that the odds are reasonably high.

People in several situations could potentially mitigate the impact of these changes:

  1. You have a high income (over $400,000) and can shift income from 2022 into 2021. That may make sense with proposed tax increases.
  2. You plan to make a backdoor Roth contribution with 2021 income, which in past years you could do until 4/15 of the next year. You may not be able to use this strategy after 12/31/2021.
  3. You can make a large gift to an irrevocable trust to use up the current high estate tax exemption (almost $12 mm). That limit may be cut in half after 12/31/2021.
  4. You have an irrevocable trust and are waiting to fund it. There may be certain advantages to moving quickly.

Please discuss any action with us, your CPA or your estate planning attorney.

The Proposal Highlights


  • Higher top tax bracket for ordinary income: If your taxable income is over $400,000 (single filer) or $450,000 (married filing joint), your marginal tax rate would be 39.6%. This compares to 35% to 37% currently, depending on your income. There are no proposed changes below those income levels.
  • Higher top capital gains tax rate: If your taxable income is above $400,000 (single) or $450,000 (married), the capital gains tax rate would increase to 25%. Most filers in this range currently pay 20% capital gains tax. This change would be effective Sep 14, 2021, preventing people from realizing gains now in anticipation of higher capital gains rates later.
  • Adds an additional 3.8% tax on S Corp profits for higher income S Corp. owners. The tax would kick in starting at $400,000 (single) / $500,000 (joint) income thresholds.
  • Cap on the maximum QBI deduction for taxpayers.The cap for the 199A - Qualified Business Interest deduction kicks in at deductions of $400,000 for single and $500,000 for joint filers.
  • Child tax credit to remain at current higher levels through 2025. This fully refundable credit is up to $3,000 / child / year ($3,600 for children under 6) and phases out eventually at incomes of $200,000 (single) / $400,000 (joint). These would be monthly advanced payments.
  • Increases to the Child & Dependent Care Credit made permanent. The American Rescue Plan Act’s increases would be made permanent at $8,000 for an individual and  $16,000 for multiple individuals. The credit would begin to phase out at $125,000 adjusted gross income.
  • Adds a 3% surtax for individual incomes over $5 million and irrevocable trust income over $100,000.
  • Tighter wash sale rules. Wash sale rules prevent an investor from selling at a loss and buying the same or similar investment within 30 days, in which case the loss used to offset gains and reduce taxes is forfeited. The new legislation would tighten this rule for cryptocurrencies and certain other investments.


  • End of “backdoor Roth contributions” after 2021. This strategy has been used by people whose income is too high to make a Roth contribution. It allows you to contribute after-tax dollars to a traditional IRA and immediately move that into a Roth with no tax due. The ability to convert after-tax dollars to Roth would be eliminated after 2021.
  • End of “mega backdoor Roth” contributions in 401ks after 2021. In 401k plans that have this option, individuals can save additional after-tax dollars in their 401k above the $19,500 employee contribution limit and convert it to Roth. The ability to convert the after-tax dollars to Roth would be eliminated after 2021.
  • No more Roth conversions for high income filers after 2031.Starting in 2032, if your taxable income is above $400,000 (single) or $450,000 (joint), you would no longer be able to move traditional IRA money into a Roth IRA. These so-called Roth conversions have been popular in lower-income years or with clients who foresee higher future tax rates.
  • Prohibits private investments in IRAs requiring investor qualification. This rule would prohibit the ownership in IRA accounts of private investments that require the investor to be an Accredited Investor (or other means tested status). This would start in 2022 with a two-year transition period for those already holding these investments in their IRAs.


  • Estate tax exemption returns to previous, lower levels in 2022.The amount an individual could pass away with or give during their lifetime without owing estate tax would reduce by 50%, to approx. $6 million, from approx. $12 million. Under current law, this 50% cut is scheduled for 2026.
  • Increased special valuation reduction for family farms & businesses from $750,000 to $11.7 million. The law would increase the special valuation reduction for real property used for family farming. The increase would align it with the proposed estate tax exemption amount.
  • Defective grantor trust strategy eliminated upon enactment. The law would disallow a popular estate planning strategy called intentionally defective grantor trusts. This includes IDGTs (intentionally defective grantor trusts), GRATs (grantor retained annuity trusts), SLATs (spousal lifetime access trusts), and ILITs (irrevocable life insurance trust). Trusts established and funded prior to enactment would be grandfathered.

Notable items NOT included in the proposal:

  • SALT tax deduction cap changes.The SALT (state and local tax) deduction is currently capped at $10,000 for taxpayers who itemize deductions. There has been discussion to increase this deduction for middle class taxpayers while potentially phasing it out for the highest income earners.
  • Elimination of step-up basis at death. Currently assets held until death receive a step-up in their tax basis to the decedent’s date of death. This allows for beneficiaries to inherit assets with a tax basis equal to the market value. Elimination of the step-up had been included in previous announcements.
  • No wealth tax. There is no language in the proposed legislation that addresses a wealth tax for the ultra-high net worth (+$50 million).
  • No Social Security trust fund relief. There is no language in the proposed legislation that addresses the shortfall in the social security trust fund. As expected, they will seek a resolution elsewhere.

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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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