A Letter to Walz Group Clients and Friends About the Current Federal Tax Proposal

Like the Walz Group team, many of you have been tracking the various budgetary, taxing, and spending negotiations through Congress over the past few months. Earlier this week, we saw the most tangible framework yet for what a change to the tax law could yield. It is important to note that none of this is law yet and that it is very possible that some items get added to OR removed from this markup. With the Senate at a 50/50 impasse and no Republicans likely to support the measure, the entire package is on very tenuous footing, though something will likely get passed eventually. Ideally, anything that gets passed is done so with enough time in 2021 to take full advantage of tax savings strategies such as timing of recognizing income and deductions. Here is a general summary of what was released earlier this week.

Individual Taxes

All of the following (except one) are proposed to be effective for 2022.

  • An increase to the top tax bracket of 39.6%. It is presently 37%. It had been 39.6% prior to the 2017 tax cuts. This is not a surprise. For tax geeks we know that the 39.6% magic number dates back to the 1993 tax increase.
  • The top tax bracket also starts at a lower income threshold than previously. The top bracket under the current proposal starts at $450,000 for married filing joint ($400,000 for singles) whereas in 2020 that bracket started at $622,051.
  • A 3% tax on individuals with modified adjusted income (MAGI) exceeding $5,000,000. MAGI includes wages, investment income, and pass-through income and often ignores partnership or rental losses.
  • The 3.8% Obamacare tax that mostly goes somewhat unnoticed, because it is primarily on investment earnings only, would expand to pass-through businesses as well, for both passive and nonpassive activity. This change is applicable for taxpayers with adjusted gross income (AGI) over $500,000 (Married filing jointly). So, a shareholder of a passthrough entity (e.g., partnership or S-Corp) may have a considerably higher tax liability since the earnings from an active business are not currently subject to the additional 3.8% surcharge.
  • The qualified business income (QBI) deduction that has eased the tax burden on many S-Corp shareholders and partnership investors is potentially going to change as well. There was concern that the QBI deduction, which essentially lowers the tax rates by a factor of 0.2 (for example, highest earners go from 37% to 29.6% on passthrough income), was in jeopardy. The proposal isn’t as drastic as having the QBI deduction removed entirely, but it does limit the deduction to $500,000 in addition to keeping the current wage and property limitations for taxpayers over a certain AGI. This means that if you have passthrough income that is eligible for QBI (which much of it is) in excess of $2.5 million, then the deduction is capped at $500,000 instead of being a flat 20% of the QBI income. QBI income of less than $2.5 million should not be impacted.
  • Capital gains. This is the one that will be hardest to plan around. Initially a budget proposal had capital gain rate changes retroactive to a date in April or May, which is highly unusual. A common thought was that it was politically unwise to do a retroactive hike and that would not pass, but the recent proposal has capital gains prior to September 13, 2021 being taxed under the existing law, and capital gains September 14, 2021 or after being subject to the new proposed rules. The proposal has those in the new 39.6% tax bracket having their capital gains taxed at a 25% rate. This is up from the 20% rate presently. Add on the 3.8% investment tax and it’s more like 28.8% from 23.8%. And, of course, if you have income over $5 million, then you need to add the 3% surcharge on to that as well. So, theoretically capital gains could go from 23.8% to 31.8%. This is still quite a bit better than some of the suggestions to have capital gains be taxed at the ordinary income rates (39.6%) for the highest earners.
  • Eliminate back-door Roth IRA contributions, a common tax strategy where an individual contributes to a nondeductible traditional IRA and then converts that traditional IRA to a Roth to allow for tax-free growth, for taxpayers with AGI over $450,000. There are also additional taxes on MEGA IRA’s (over $10 million) and additional limitations as to who can contribute to an IRA if you already have a MEGA IRA.


  • As expected, the lifetime exclusion is proposed to decrease. Right now, it is $10 million indexed for inflation, which is $11.7 million in 2021 or $23.4 million for a married couple. It would be cut in half under this proposal to just over $6 million ($12 million per couple) which would then be adjusted for inflation. This would be effective for deaths and gifts after December 31, 2021. This is an area that seemingly is up for consideration depending on which party controls Congress and the White House, so planning around a future event like death can be a challenge. Here is a simple example: If a person dies on December 31, 2021 with $12 million they will pay $120,000 in estate tax, but if they were to die on until January 1, 2022, the estate tax is $2.4 million.
  •  The use of new grantor trusts after the date of enactment would be severely curtailed. We are strongly encouraging those with net worth in excess of $10 million jointly or $5 million individually to think hard about doing some estate planning NOW! You can start the discussion with us but you will need an estate planning attorney more than us and we think there is going to be rush to get documents prepared quickly. We anticipate that estate planning attorneys are getting inundated with requests.
  • There had been a suggestion that unrealized gains would be taxed at death, but that does not appear to be in this proposal. Additionally the estate tax rate remains 40% and there has been a lot of talk about increasing it back up to 55% on the larger estates. Senator Sanders is pushing for $3.5 million and 55%. We believe the proposed changes at $6 million and no rate change are a significant possibility. Some of the farm state Democrats insisted on a carveout for family farms and its in the proposal that those farms would continue with higher exemption amounts.

Research & Development

Under the Tax Cuts and Jobs Act of 2017, there was a little-noticed corollary that required entities to start amortizing their R&D expenses in 2022 instead of expensing them. This proposal delays that until 2026. For those of you who have R&D expenses or do an R&D study, this warrants a bit more discussion but is generally a positive development.


The C-Corp rate would go from 21% to 26.5% for corporate incomes over $5 million. For taxable income under $400k the rate would go down to 18%. Given some of the above changes, it is possible that some S-Corps will consider C-Corp structure depending on their other needs and goals. Short-term tax avoidance is not necessarily the best reason to shift entity structure, but it may make sense for some organizations to consider. As always Pa’s 9.99% rate makes this less appealing especially if you only sell to Pa customers.


There would be significant increase in taxation with respect to foreign income of US taxpayers which are beyond the scope of this summary.
The proposal would also allow S corps formed prior to May 13, 1996 to convert tax free to LLC’s (partnerships) which may make sense for some taxpayers if the 3.8% Medicare Tax on all earnings of S owners with higher income becomes law.
Losses on crypto would be treated like stocks so you could not buy back the crypto within 30 days and still take the loss as you can based on current law.

The following link outlines a general summary of how the spending would be paid for by component: https://taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/

There is also reportedly consideration for changes to the $10,000 itemized deduction limitation on state and local taxes, which would generate additional deductions for many taxpayers, but this has not been announced yet.

We will keep you updated as the year winds down and there is greater clarity on the passage of any legislation. In the meantime, please contact your business partners at Walz Group to discuss any of these proposed changes.

The Walz Group Team