The "Biden Tax Plan"

Technically, we are witnessing several different tax and economic bills that are at various stages of the legislative process. Most of these are found in the H.R.5376 - Build Back Better Act. There are some that are considered to be a net benefit to the economy, and others that will help certain individuals with tax credits. These plans are using a process called reconciliation to bypass the limits that can be imposed by the Senate. This process demands that any new legislation cannot add to the debt burden, and therefore must 'pay for itself'. Along with this, you may have also heard about the Trillion Dollar Coin, this is an idea where we can bypass the debt ceiling by minting a coin worth a Trillion Dollars. This idea comes from Warren Mosler, who is credited within founding Modern Monetary Theory (MMT). As of today, we're not running with the coin, so the path to passing the Act will be via reconciliation.

The revenue raising measures within reconciliation impact taxpayers directly, such as with a new higher ordinary income tax rate, and indirectly, such as restrictions on retirement contributions when assets and income reach certain thresholds.

There are several changes proposed which will have a negative impact on most clients, and some that may provide a positive impact. The extent of exposure to these pros and cons will vary, and may not be as bad as it seems.  There are several provisions appear negative, but with closer examination appear to be more of a sound bite than a real issue, which we will explore later. In such cases it might be fairly easy to navigate around such new rules with a little planning.


We are seeing a situation where reconciliation is requested to pass several tax bills. Reconciliation is a process that allows a proposed bill to pass through the Senate and into law without the ability to filibuster and without the requirement of a ‘supermajority’ of votes.  In recent years where both houses have been somewhat equally split around 50/50, reconciliation has been a means to ‘get things done’. Without it, a required vote of 60 from 100 senators would be challenging to acquire.
In a nutshell, reconciliation requires that any new laws that are implemented will contain provisions that do not increase the federal deficit, IE that they pay for themselves. To highlight this we can split the proposed bills into two broad categories, those that are ‘spending’ (good for some people, but require reconciliation) and that are ‘paying the cost’ (bad for some people, and used to balance the budget).

We should also note that some of the spending items may not appear good for certain individuals. For example, the taxpayer with no children but who earns over $400,000 from their S Corporation may not be overly happy to hear that the child tax credit of $3,600 (under age 6, $3,000 under age 17) for 2021 is being extended into future years, and that their S Corporation distributions may be subject to a 3.8% surtax under NIIT. As such, we are trying to avoid good and bad in the general sense, and rather consider those at the individual level.
In total, a forecast by the Tax Foundation determined that the total cost of spending will be $130.2B in the form of extended and modified tax credits, and the total revenue generated would be $175.10B, thus creating a surplus of $44.90B.

You can see a breakdown of these by line item in their article on the topic.Tax Foundation Build back better plan

Major Tax Planning Changes

Tax Type or Impact
Current Method
Proposed Method
Single Filer
Married Filing Joint
Ordinary Income Tax
Top rate of 37% and wider 35% bracket
Top rate of 39.6% and narrower 35% bracket.
$400,000 and above
$450,000 and above
Capital Gains Tax top rate increase
20% top rate for long term capital gains
Increase top rate to 25%
$400,000 and above
$450,000 and above
Prohibited backdoor IRA/401(k)
Allowed after-tax to Roth via backdoor
Ending of this option
All income levels
All income levels
Reduction in unified credit amount
$11.7M per person lifetime exclusion
$6.2M per person lifetime exclusion
All income levels
All income levels
Passthrough (S Corp) new NIIT Tax
S Corp distributions FICA and NIIT exempt
Applying 3.8% to taxpayers based on income level.
$400,000 and above
$500,000 and above
Qualified Business Income (QBI) limitation
Uncapped if not SSTB and qualified wages exist.
Imposing an additional hard limit on maximum QBI.
$400,000 maximum
$500,000 maximum
Capital Gains Tax (Wash Sale Rule)
Excludes Crypto, FX and certain others
Inclusion of these types of trading
All income levels
All income levels
Corporate Tax Rate increased
21% of retained earnings
26.5% of retained earnings
All income levels
All income levels
GILTI Tax (Offshore corporations)
50% deduction and 10% for QBAI
37.5% deduction and 5% for QBAI.   Effective rate of 16.5%
All income levels
All income levels
High-Income Conversion Prohibition (retirement accounts)
May convert pretax to Roth at any income level
Prohibited from conversion
$400,000 adjusted taxable income
$450,000 adjusted taxable income
Restricted retirement contributions
Does not exist
When accounts sum over $10M, prohibited.
$400,000 adjusted taxable income
$450,000 adjusted taxable income
Large account required minimum distribution (RMD): $10-20M range
Does not exist
Accounts summing between $10M and $20M will be subject to RMD of 50% of the amount over $10M
$400,000 adjusted taxable income
$450,000 adjusted taxable income
Larger account required minimum distribution (RMD): $20M and over range.
Does not exist
RMD entire amount above $20M Roth must come first
$400,000 adjusted taxable income
$450,000 adjusted taxable income
Limited Partner discounts ending
Family limited partnerships may discount value of gifts using appraisals
Eliminate discount options
All income levels
All income levels
Changes to GRATs and Intentionally Defective Grantor Trusts (IDGT)
IDGT currently remove assets from estate. GRAT taxation allows for tax free exchange of assets
Recall IDGT to estate, make transfers to and from the GRAT a taxable event
All account sizes
All account sizes
Trust income surtax
Does not exist
New 3% tax for trust income in excess of $100,000
All personal income levels
All personal income levels
Ordinary income surtax
Does not exist
New 3% tax for ordinary income in excess of $5M
$5M and above
$5M and above
Child and Dependent Care Credit
Temporary increase to $4,000/$8,000
Extending into future years. Phased out at two levels.
$125K phase out starts. At $438K to $0
$125K phase out starts. At $438K to $0
Child Tax Credit
Temporary increase to $3,600/$3,000
Extending into future years. Phased out at two levels.
$75K reduces to $2K. $200K to $0.
$150K reduces to $2K. $400K to $0
Dependent Care FSA
Temporary increase to $10,500 ($5,250 single)
Extended into future years.
Required earned income or student
Requirement applies to both spouses
Tax Type or Impact
Current Method
Proposed Method
Single Filer
Married Filing Joint

Discussion of Key Items

From the list above we can see that some items are introduced to all taxpayers, whereas other items phase in at certain levels of income. Let's work through the list to see who is most impacted by each, and whether there are we can find strengths, weaknesses, opportunities and threats within them.

Ordinary Income Tax Increased to 39.6% top bracket

Clearly, this is impactful to higher earners, as the bracket starts from $400,000 (single filer) and $450,000 for married filing joint (MFJ). However, this is also a case of something that really won't change any strategy. For the W2 employee, If you were previously earning over $400,000 as a single filer, your objectives would be to limit exposure to the tax bracket by deferral of income. You wouldn't suddenly start to defer now your rate is 39.6% when you wouldn't at 37% brackets.

Father, give us courage to change what must be altered, serenity to accept what cannot be helped, and the insight to know the one from the other. - Niebuhr

For the self employed, we can see potential opportunities, and an analysis of passthrough vs C Corporation election must be made, because the Ordinary Income Tax bracket increase is only one of several tax increases that are interlinked. These include higher capital gains tax rates, Net Investment Income Tax (NIIT), and new surtaxes. C Corps do suffer from double taxation, but they also may be methods to defer tax into lower brackets.

Tax Planning with Tax Rates and Implied AGI Limits

With annual tax planning, we look at both tax rates and adjusted gross income (AGI) limits. Thus far, these limits are soft and implied which makes them harder to see, but a good tax plan considers them. Several of the new provisions are hard limits, but the difference might be negligible. We can see that If we look at the proposal where the taxpayer is prevented from participating in pretax Roth conversions.

Pretax Roth Conversion Prohibited

This applies via a two step test. First, if income is over $400,000 ($450,000 MFJ) and second, if the sum of the retirement accounts exceeds $10M. In such a scenario the taxpayer will no longer be allowed to perform a Roth conversion. Theoretically, this does raise the stakes in terms of planning accuracy, but it doesn't necessarily change anything for taxpayers who are near age 65 and considering partial Roth conversions in conjunction with Income-Related Monthly Adjustment Amount (IRMAA).

IRMAA as a 'Soft Cap'

 IRMAA is your required contribution to Medicare Part B and is derived from income two years prior to the year that you are required to pay it. For example, your 2021 IRMAA contribution is based upon your 2019 income. Pretty much everyone has to pay Medicare Part B at age 65 , even if you have a retiree health plan from a prior employer, so when you are age 63 onwards, tax planning for Roth conversions should consider the IRMAA impact, and not just the tax bracket. The current rates for this are below:

Single Filer
Married Filing Joint
IRMAA (per person, monthly)
$88,000 or less
$176,000 or less
above $88,000 up to $111,000
above $176,000 up to $222,000
above $111,000 up to $138,000
above $222,000 up to $276,000
above $138,000 up to $165,000
above $276,000 up to $330,000
above $165,000 and less than $500,000
above $330,000 and less than $750,000
$500,000 or above
$750,000 and above

Roth conversions at any time (current law)

Under the current law, we can Roth convert at any time, however it is most likely that Roth conversions will occur near IRMAA years. The rational is simply that most people who have accumulated significant pretax retirement accounts are nearing retirement, and will not want to convert while working. The early retirement (prior to claiming Social Security) years are prime for Roth conversion, but even here we would be unlikely to suggest that a married couple aged 63 convert $450,000 into Roth, as doing so would push them into $475.20 IRMAA bracket. This would result in IRMAA of $11,404.80 for the year. Instead, we would be generally looking to move income up to $176,000 in most cases, and hope to repeat this for several years.

Clearly, IRMAA alone is not the deciding factor in current law, but it is a key criteria in calculating the payback period of a Roth conversion. Similarly, under new law there is always 'some' other income sources for the retiree, but in an ideal situation they would have minimal passive income, therefore we can still take a person that does have a $10M IRA up to certain income levels via Roth conversion, but as with IRMAA we need to be mindful of the ceiling that comes with this, and always think beyond just the effective tax bracket.

Similarly, when it comes to the new capital gains tax rate of 25% there are situations when we can decide to be taxed at this rate, and situations where we can decide to harvest gains below the $400,000 ($450,000 MFJ) thresholds. When such optionality exists we are able to factor new tax rates into the equation, and they may or may not impact us.

Backdoor Roth IRA and Mega-backdoor Roth 401(k) Ending

Previously, backdoor Roth IRA's have been allowed. The method circumvents the Roth IRA income limits via a two step process: fund a traditional IRA (but don't deduct it) and convert to Roth. 401(k) plans also allow for this, providing that the employer opts in. For the 401(k) plan, an important component is inservice rollovers or distributions. This component allows the individual to fund and convert quickly. Some plans automate this process, so there is little effort required.

The change here is to prevent the conversion of after-tax to Roth, thus ending this strategy.  We see two planning changes here:
complete all conversions before 12/31/2021. Sometimes we have cases were 401(k) accounts are booked in the calendar year but not funded until the following year, in this case it would appear that this would prevent the funds from being converted.

Secondly, we would need to evaluate whether after-tax contributions without the ability to convert to Roth are a viable strategy. While clearly less attractive, we need to remove any anchoring we might have to 'how things were' and focus on the new scenario objectively. In some limited cases, it might be worth continuing the strategy of funding after-tax accounts.

As opportunities close, old ideas become new again

As we navigate the changes, we find that some other strategies become more attractive, and will be more likely to be used than previously. Here's some examples:

Anything income related ($400,000/$450,000)
Control AGI to allow partial conversions similar to IRMAA plan
Capital Gains increase to 25%
Shifting via Kiddie Tax route
S Corp NIIT 3.8% Surtax
Cash balance plans to drop income below limit
Reduction of Unified Credit Amount (lifetime exemption)
Increased focus on annual gifting
New 3% surtax on Trust income greater than $100,000
Increase efficiency of investments and focus on tax awareness

We've always appreciated that a Cash Balance pension plan is an attractive way to lower income, but now that it can push high earners below these key thresholds of $400,000/$450,000 (MFJ) it brings even more to the table. The argument for a Cash Balance plan previously focused solely on tax bracket reduction, but as we discussed earlier, all tax planning is both tax bracket and implied AGI impact.

Reduction in Unified Credit amount

Estate and Gift taxes use a Unified Credit to calculate exemption from tax. Unofficially we use the 'Lifetime Exemption' to calculate this, which is currently $11.7M per person with portability at the federal level. A reduction here will see this lower to $6.02M per person from 2022. A common question people have here is within the mechanics of such a reduction, examples illustrate how this works (and doesn't) work for planning purposes.

Underlying Question
I have $2M, if I give away $1M before the change, will I still have $6.02M available?
How is a partially used exemption apply when the limit reduces?
You'll have $5.02M remaining. The balance is calculated using Form 709 and 706 which asks you for prior use of exemption.
I have $10M, if I gift it today is there a benefit?
If I have used more than the new limit, what will I have remaining?
You'll have $0 remaining, but you did gain a benefit as you captured the entire $10M available to you before it lowers.
If my wife and I have $10M combined, who should make the gift?
How does portability and marital deduction play into the lifetime exemption?
If you gift equally, you will each only have $20,000 remaining. If you first transfer to one spouse and have them gift the entire amount, you will have $0 and $6.02M remaining.
Planning for the reduction

Because of the calculation, it requires that the household (individual or married couple) has assets in excess of $6.02M today to be able to leverage this transition from a higher to lower lifetime exemption. Since the method is via gifting, we would also want the amount to be considerably higher than $6.02M to be viable, unless we are using gifts to transfer assets 'to ourselves' via trust.

Intentionally Defective Grantor Trust (IDGT)

The proposed plan makes several changes to Trust taxation, including the IDGT strategy. The purpose of the IDGT is to move assets out of the name of the individual and into the name of a Trust.  The IDGT becomes defective because the the individual elects to pay income tax, rather than the Trust. The benefit of the IDGT is found in several areas, the key ones being that assets are moved out of the Estate (but the individual may still access them). This aids with estate planning and asset protection. Asset swaps and loans are allowed which allow for sophisticated tax planning transactions to swap gains and losses between the individual and the trust.

The new law will pull these back into the Estate on death, and also will impact taxation of transfers to and from the Trust during life. There is a lot to digest in this, and we can expect litigation here.  Separately, there is a new surtax of 3% that applies at Trust income of $100,000 or more, which may place a further burden on owners of Grantor Trusts.

Unfortunately, the IDGT, or other forms of Grantor Trust would be ideal ways to capture a higher exemption today without losing control of the assets, but this option may no longer exist with the new plan.

High earning S Corporation (S Corp) Owners

This is an example of a profile that could be severely impacted by the new proposals. Again, it is income driven, and as such it might be something that is mitigated via proper planning. If we take the following example to illustrate:

Married Filing Joint taxpayers. Spouse 1 has a W2 (non S Corp) of $200,000. Spouse 2 has an S Corp with $800,000 of earnings before officer compensation. Due to these income levels, even with a 401(k) and Cash Balance plan, the household will be subject to the following items from the proposed Act:

The challenge here is whether we can bring income of $1M low enough to avoid these issues. Since some occur at $450,000 and others at $500,000 we would be looking for a reduction of around $500,000 to $550,000. Depending on age, the combination of Cash Balance plan and 401(k) could eliminate a sizable chunk of this, with a current maximum of $407,500 at age 70.

Cash balance and 401(k) combined
Cash Balance and 401(k) maximum limit by age

While the Cash Balance route is helpful, it can be challenging for younger taxpayers, and we need to keep in mind that employees of the company are generally required to be covered by such a plan.

Deferral via C Corporation (C Corp)?

First, we should note that C Corps suffer from double taxation, once at the entity level for any retained earnings, and again when the retained earnings are distributed via dividend. Also, there are scenarios where a redemption of stock may be tax free, under 26 USC § 302, providing that its nature is substantially different in appearance from a dividend. This can be used in exit planning from a C Corp. In addition to the concern of double taxation, the Act proposes raising the corporate tax rate from 21% to 26.5%. Therefore, any plan to use a C Corp for deferral isn't as good as it would be under current law.

The advantage of the C Corp is also found within its double taxation. By being able to hold earnings at the entity level, the underlying taxpayer can maintain a lower personal rate of income, and thus avoid several of the issues that derive from the $400,000 - $450,000 range. However, there is a severe limitation on this strategy from the Accumulated Earnings Tax (AET). This applies when the retained earnings of a C Corp exceed $250,000 and it is unable to justify that this is ordinary and necessary to provision for future expense needs. There is an additional quirk where the C Corp may distribute dividends after 12/31, providing it is done by the 15th day, four months after the close of the fiscal year. For calendar C Corps this is April 15th. This would allow intra-year income shifting, where the individual could avoid the AET and keep dividend income to $0 in the current calendar year, by timing the dividend to arrive in the following year.

Using a C Corp might be a way to help mitigate the pass through impact of an S Corp, but it will vary widely based on the broader picture. Lastly, we should consider that we can convert an S Corp (or LLC) to a C Corp, but we are revoking an election when doing so, which is subject to a five year wait before it can be reversed. An alternative approach may be to create a second entity that is a C Corp that could cross bill the S Corp to shift earnings away from the individual. Care would be needed to structure this in a way that is appropriate within the tax code, but done correctly it provides more flexibility, and less (tax) cost than converting the entire entity into a C Corp.


There's a lot of good things in the plan for lower income households, but some of the reconciliation requirements are less favorable to higher earning individuals, which might appear that this is something of a 'Robin Hood' theme (taking from the rich to give to the poor). And while that can be seen to be true in some cases, there's a lot of scope within this to plan around. The biggest weakness in the Act from a revenue raising perspective is that it relies upon income as the basis of most calculations, and income is something that may be modified, particularly for the self employed and the retiree. As such, the new income limits within the Act become advisories and guidelines that will encourage us to modify plans, but not always completely change them.

If you liked this post, feel free to share it with others via email or Social Media, and if you notice anything that you think should be corrected feel free to drop me a direct message, or email to

Matthew Hague Headshot
Matthew Hague CFP®, EA

‍My name is Matthew Hague, and I am a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent with the IRS .

I founded Guide Wealth Management to help provide independent, fiduciary advice to our clients. Prior to launching the firm I attended NYU to study Financial Planning and am currently enrolled in a Masters in Taxation degree.

Got Questions?

Get in touch

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.