October 29, 2021
We may have some clarity regarding the highly debated social spending bill, but as of this print, it is not yet signed. Involved are important tax and estate planning issues:
The social spending $3.5 Trillion package seems to have been reduced in an effort to win necessary support to pass. Not everything involving taxes has been removed, but here are a few important topics mentioned. They may directly affect financial, tax and estate planning of our clients:
PROPOSED COMPROMISES TO THE BILL:
-Reversal of their plan to eliminate ROTH IRA conversions, and back door ROTHs. We often recommend this unique ability to build tax free retirement for those normally not qualified to contribute to a ROTH IRA.
-They appear to have removed a significant reduction of estate and gift tax exemptions. (As many know, these assets have already been taxed except for unrealized capital gain: see next.
-It also appears they are not eliminating the step-up basis applied to inherited assets. In other words, inherited assets will still receive a step up in basis to the fair market value as of the date of death. Families with inherited property, even one home owned by a parent that was purchased decades ago and lived in for years, may have been subject to large capital gains on the sale of that home to settle the estate. Many homes bought for $40,000 in CA and other high property value states in the early 1960’s are worth well over $1 million dollars. Had the removal of stepped-up basis occurred, AND a reduction in the estate tax exemption occurred, a relatively ordinary inheritance could have been subject to significant taxes that would reduce the planned inheritance.
WHAT IS CURRENTLY STILL IN THE BILL:
-Increase to the top income tax rate of 39.6% and a 20% top rate on investment income.
-Income above $10 million to be taxed at an additional 5% and scaling up from there. This includes realized capital gains, investment income and earned income. These proposed surtaxes, according to Jeff Levine of Buckingham Wealth Partners will likely occur with:
Sale of large business or other assets such as real estate AND Trust and Estate distributions where the surtax kicks in at a lower amount.
This increase can affect some Inherited IRAs subject to the 10 year payout. A 10 year Inherited IRA distribution could be subject to a 5% surtax if it grew over
those 10 years and the required distributions were over $200,000 a year to deplete. Tax planning is important. Some with larger IRAs may want to consider more ROTH
conversions during their lifetime. And as Jeff Levine mentions, there may be an increase in installment sales of businesses to spread capital gains (income) over a
period of years.
-One item that remains unclear is the discussion of removing the SALT cap (State and local tax deductions on itemized returns capping at $10,000.)
-Also unclear is reporting to the IRS banking deposits and withdrawals at low amounts ($600.00 and other figures have been discussed). This invasion of privacy has
been debated on both sides of the house and within the banking industry. Banks and the IRS are currently ill equipped to enforce this.
Our Clients have individual and unique situations. At Three Points Financial, weighing tax and planning strategies is and will continue to be a valuable part of our fiduciary, comprehensive services. As we continue to follow tax and estate changes we will keep you updated.