by Kathy Sablone, JD, AEP®, Co-Chief Planning Officer
The House passed a new version of the Build Back Better plan on November 19, 2021. The bill must still be passed by the Senate where it is subject to additional changes and an uncertain future. The notable tax law changes within the current bill are as follows:
Individual Income Tax
- State and local tax (SALT) deduction limit is increased from $10,000 to $80,000 ($40,000 for trusts and estates or married filing separately) for tax years from 2021 through 2030.
- Net investment income tax of 3.8% is expanded to include pass-through income from S corporations, LLCs, or partnerships even if the taxpayer is actively involved in the business. This change would not apply to distributions taken as salary that are subject to FICA or self-employment taxes. This provision applies to single filers and trusts and estates with income over $400,000 and married filing jointly with income over $500,000 for tax years after December 31, 2021.
- A 5% surcharge is added for modified adjusted gross income over $10 million – same limit for single or married filing jointly, as well as an additional 3% for modified adjusted gross income over $25 million. The limit for trusts and estates is $200,000 for the 5% surcharge with an additional 3% surcharge for income over $500,000. This proposal would be effective for tax years after December 31, 2021.
- Rules for Qualified Small Business Stock (Section 1202) are modified to provide that the special 75% and 100%exclusion rates for gains realized from certain qualified small business stock will not apply to individual taxpayers with adjusted gross income of $400,000 or more, or for any trust or estate. The 50% exclusion remains available for all taxpayers. The amendments made by this section apply to sales and exchanges after September 13, 2021, with an exception for contracts that were binding on this date.
Retirement Plans
- “Back Door” Roth conversions, i.e., converting portions of after-tax traditional IRA to a Roth IRA will not be permitted after December 31, 2021.
- Roth conversions are being eliminated for taxpayers with taxable income over $400,000 for single tax filers and
$450,000 for married filing jointly beginning with tax years after December 31, 2031. - No additional contributions to a Roth or traditional IRA if aggregate balances exceed $10 million for single filers with income over $400,000 or married filing jointly with income over $450,000.
- Any individual with an aggregate balance over $10 million in Roth IRAs, traditional IRAs and defined contribution plans will be required to take a minimum distribution of 50% of the amount by which the limit is exceeded. Anyone with balances over $20 million will need to take a distribution that brings the balance below $20 million, taking first from Roth plans. This section will not be effective until after December 31, 2028.
Previous Proposals That Did Not Make It Into The Bill Include:
- No change to capital gains tax rates.
- No change to top individual income tax rate.
- No elimination of Section 1031 exchanges.
- No change to Federal Estate and Gift Tax Exemption.
- No change to step-up in cost basis at death.
- No change to grantor trust rules.
- No changes to rules for valuation discounts on the transfer of nonbusiness assets.
- No prohibition on private equity investments in IRAs.
If you have any questions, please contact our Estate and Financial Planning Group:
Alisa Kim O’Neil, JD, CTFA, AEP®, CDFA®: [email protected] or 617-275-0313
Kathy Sablone, JD, AEP®: [email protected] or 617-956-9712
Important: This alert does not contain any legal or tax advice. You should always consult with your attorney, accountant or other professional advisors before changing or implementing any tax, investment or estate planning strategy.
IRS Circular 230 Disclosure:
Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Professional Designation Minimum Requirements Disclosures:
AEP® – Accredited Estate Planner®. Minimum requirements for the AEP® designation include active practice for a minimum of five years within the following disciplines: accounting; insurance and financial planning; law; philanthropy; and trust services with at least one-third of the individual’s time devoted to estate planning. Additionally, one or more of the following professional credentials: JD, CPA, CLU®, CFP®, CPWA®, CFA, CAP®, CSPG, CTFA, MSFS and MST is required, along with three professional references and current membership in an affiliated local estate planning council.
CDFA® – Certified Divorce Financial Analyst®. Minimum requirements for the CDFA® designation include a bachelor’s degree with three years of approved on-the job experience along with successful completion of the CDFA® examination consisting of 150 multiple choice questions. 30 hours of continuing education is required every two years.
CTFA – Certified Trust and Fiduciary Advisor. Minimum requirements for the CTFA designation include 5 years minimum experience in wealth management, a bachelor’s degree and passing the CTFA examination. 45 continuing education credits are required every three years.