The White House still envisions Congress taking another crack at some version of President Biden’s $1.7 billion Build Back Better Act, and though many doubt the future of the social and climate plan, clients should still watch for possible tax changes.
“Wealthy clients should be contacting their advisors now about tax planning and whether they should be accelerating recognition of income and deferring deductions before any tax legislation is passed,” said James G. McGrory, CPA and shareholder at Drucker & Scaccetti in Philadelphia.
The biggest challenge facing wealthy taxpayers over BBB remains the complexity of the Internal Revenue Code, said Lisa Cappiello, director in the Personal Wealth Advisors Group at Eisner Amper in New York. “The Build Back Better Act had many wealthy taxpayers bracing for higher tax rates and, although various provisions were eliminated before being passed by the House [in November], the bill currently sitting with the Senate includes provisions that may apply to the 2021 tax year,” she said.
Mary Kay Foss, a CPA in Walnut Creek, Calif., and an active member of American Institute of CPAs, said, “As a group we’re very concerned about the retroactive nature of some of the BBB provisions.”
Other provisions—a qualified small business stock (QSBS) exclusion, as well as changes to the state and local tax (SALT) cap limitation and the excess business loss limitation rules—“may lead to additional hurdles for high-net-worth taxpayers,” Cappiello said.
Another provision was a new 5% surtax on trusts and estates with modified adjusted gross income (MAGI) greater than $200,000 and an additional 3% surtax on trusts and estates with MAGI exceeding $500,000, McGrory said. “Although it’s uncertain if any legislation that passes will be retroactive to Jan. 1, wealthy individuals owning trusts should consider accelerating income—for example, by selling highly appreciated securities—while the surtax doesn’t apply,” he said.
Retirement plans also figured in the act, and “the BBB focus on the backdoor Roth seemed way out of proportion,” Foss said. “Congress was concerned with wealthy taxpayers stuffing their Roth IRAs with after-tax money, but the majority of users of the backdoor Roth were youngish people who made too much money to make a Roth contribution.
“The abuse wasn’t with the backdoor Roth,” Foss said. “It occurred in 401(k) plans that allowed unlimited after-tax contributions to the Roth 401(k) portion of the plan. Large contributions and fast-growing investments led to the big balances that made the news.
“Taking [Roth IRAs] away by BBB doesn’t make sense to me,” she added. “But until it happens, I recommend that taxpayers continue to maximize their use of Roth.”
Added McGrory, “Wealthy clients considering a backdoor Roth contribution should reach out to their advisors to discuss the likelihood of whether any tax law change here would be retroactive to the beginning of the year.”