Taxing Matters Q3 2021

Because the Act contains a large number of spending provisions, the tax provisions generally go in one direction – up. We begin with a discussion of the proposed changes that could impact individuals and families.

The top individual marginal rate would increase to 39.6%, effective for tax years after December 31, 2021. The highest tax rate on long-term capital gains and qualified dividends would increase to 25% from 20%. This change would apply to capital gain and dividend income recognized after September 13, 2021, the date the Act was released by the House Ways and Means Committee. There would be a surcharge of 3% of adjusted gross income applied to married taxpayers filing jointly whose income exceeds $5 million; the 3% surcharge would apply to single taxpayers whose income exceeds $2.5 million. The current limitation on the deductibility of state and local taxes of $10,000 would remain in effect.

Looking for new sources of revenue, Congress decided to focus on individual retirement accounts. The Act would prohibit new contributions to Roth or traditional IRAs if the balance in the accounts exceeds $20 million as of the end of the prior year. There would be a new minimum required distribution for individuals whose combined Roth, traditional and defined contribution plan values exceed $10 million and whose income exceeds $400,000. These taxpayers would be required to take a distribution of 50% of the amount of their traditional IRA, Roth IRA and defined contribution account balance that exceeds $10 million combined. The Act would prohibit individuals with more than $20 million in retirement accounts from holding Roth funds. The Act would also eliminate back-door contributions to Roth accounts, where funds that are non-deductible are contributed to a traditional IRA and shortly thereafter rolled over to a Roth IRA.

Another provision affecting Roth and traditional IRAs prohibits investing in certain securities. Typically, these are venture capital partnership interests or stock in startup enterprises, which generally are available only to “accredited investors” – those who meet certain income levels, educational standards, etc. IRAs holding such investments must divest them within two years of the date of enactment of the Act. The purchaser of the prohibited investment cannot be related to or affiliated with the owner of the IRA. Be aware of the prohibited transaction rules governing retirement plans: they are a trap for the unwary. Given the complexity of these rules, we recommend you consult with a qualified advisor.

The Act would accelerate the reversion of current estate and gift tax exemptions to 2022. Under the Trump tax plan, the current exemptions were set to revert to prior levels in 2025, but under this legislation, reversion would take place in 2022. The estate tax exemption would be $5 million, and when indexed for inflation, would be approximately $6 million next year. There has been a lot of talk about eliminating the step up in basis (i.e. the adjustment to cost basis that occurs as of the date of an individual’s death), but the Act does not contain this provision. The 1986 changes to the law provided for carryover basis, thus effectively eliminating step up. That change proved to be unworkable, and that may be the reason it is not in the Build Back Better Act. The proposed legislation also took aim at eliminating some favorite estate planning techniques such as qualified personal residence trusts and Grantor trusts, which come in a number of different flavors. Time will tell how many of these revenue-generating changes make it into the final bill.

More Insights

Taxing Matters

Understanding the 2024 IRS Inflation Adjustments: What You Should Know

As we enter the new year, we highlight key IRS inflation-adjustment changes for 2024. Here is what you need to know: The IRS has released inflation adjustments for over 60 tax provisions for the 2024 tax year.
Read more

Taxing Matters

Clarifications on the Massachusetts Estate Tax Amendments

On October 4, 2023, Massachusetts Governor, Maura Healey, enacted comprehensive tax legislation that will modify a wide range of Massachusetts tax laws, including those related to estate tax.
Read more

Up Next