Week Ending 9/17/2021

Continuing talk on when the correction in the market will occur.  Interestingly, the commentary I’ve read says that it will happen, but eventually it’ll be no big deal-i.e., no long-term correction.  As in all of life, we’ll see. On the week, the Dow Industrials slipped less than 0.1%, to 34,584.88; the S&P 500 shed 0.6%, to 4432.99; and the Nasdaq Composite fell 0.5%, to 15,043.97.

One interesting development this past week was the unveiling of the Democrat’s tax proposal- the American Families Plan, coming from the House Democrats.  Though this is a long way from a final tax law, here are the highlights that were released this week:

The bill includes a host of new tax increases on households earning more than $400,000:

  • restoring the 39.6% top marginal rate (which was reduced to 37% by the 2017 Tax Cut & Jobs Act).
  • increases the top capital gains rate to (only) 25%, although it lowers the amount of income needed to get into the top tax bracket (for both ordinary income and capital gains) to only $400,000 (for individuals, or $450,000 for married couples).
  • the taxpayers who will be most impacted by the new rates are those in the $400,000–$500,000 income range, who will see themselves move from the current 35% bracket to the new 39.6% bracket – as higher earners who were already in the 37% bracket will see ‘only’ a 2.6% increase to 39.6%.
  • a limitation on the Section 199A deduction for Qualified Business Income (QBI).
  • an expansion of the Net Investment Income Tax (NIIT) impacting S Corporation owners.
  • the bill’s aim to eliminate the ‘backdoor’ Roth strategy, prohibiting Roth conversions of after-tax funds in retirement accounts altogether.
  • prohibiting all Roth conversions for those in the top income tax bracket (but only after a 10-year window, subtly encouraging high-income taxpayers to convert to Roth accounts – and pay taxes – sooner rather than later)
  • 2 new rules for high-income taxpayers with more than $10 million of aggregated retirement account assets:
    • a prohibition on making new IRA contributions,
    • a new Required Minimum Distribution of 50% of the combined balances above $10 million (and 100% of combined balances above $20M), forcing dollars out of large retirement accounts. However, these forced-distribution rules only kick in for taxpayers in the top tax brackets, meaning those who are able to reduce or shift their income will still be able to contribute and accumulate retirement savings above and beyond the $10 million cap.

The significant reforms to estate law:

  • a 50% reduction in the estate and gift tax exemption – while simultaneously increasing the special valuation reduction for real property used in family farms and businesses from $750,000 to $11.7 million.
  • cracks down on Intentionally Defective Grantor Trusts (IDGTs) by including those trusts’ assets in their grantors’ estates.
  • any sales between an individual and their own grantor trust will be treated as the equivalent of a third-party sale, and any transfers out of a grantor trust will be considered a taxable gift.
  • Family limited partnership discounts would be similarly curtailed as nonbusiness assets – including stocks, bonds, options, Real Estate Investment Trusts (REITs) or mutual funds, and trademarks – would no longer be eligible for valuation discounts (though any remaining bona fide business assets would still be eligible for a minority and marketability discounts as appropriate).


From Kitces