Democrats took a machete to President Biden’s Build Back Better plan this week, slashing the original $3.5 trillion social spending package to $1.75 trillion in order to win necessary support from moderate Democrats, most notably Sen. Joe Manchin (D-W.Va.) and Krysten Sinema (D-Ariz.).

In the process, some of the tools financial advisors use to help investors build and preserve wealth were saved, while some of the more aggressive proposed taxes were sliced out of the plan, much to the relief of some financial advisors across the nation who took to Twitter to celebrate.

Provisions of the plan that would have eliminated Roth IRA conversions and back-door Roths, reduced estate and gift tax exemptions and taken away the stepped-up basis heirs use for calculating taxes on inheritances have been removed from the bill, along with the proposed top income rate of 39.6% and the proposed 20% top rate on investment income.

“Words can’t describe how happy I am that Roth conversions and back-door Roths are here to stay,” Morgan Ranstrom, co-founder of Trailhead Planners in Minneapolis tweeted. “The benefits these strategies provide can continue to be used by accumulators and retirees to improve their changes at retirement success.”

Chad Chubb, founder of WealthKeel, a Philladelphia-based RIA firm that works with Gen X and Y physicians, said when he heard the news, he “literally just yelled out loud! Fantastic news!”

Instead, the plan calls for income above $10 million to be taxed at an additional 5% rate and for income above $25 million to be taxed another 3% on top of that. As a result, the surtaxes would apply to adjusted gross income, including wages, dividends and realized capital gains. That means the top tax rate on ordinary income would rise to 45%, plus 3.8% in other taxes, while the top total tax rate on capital gains would be 31.8%. 

Some 22,112 tax returns that reported an adjusted gross income of $10 million or more in 2018 were sent into the IRS, according to the Wall Street Journal.

Jeff Levine, chief financial officer of Buckingham Wealth Partners in San Jose, Calif., said it is “fair to say extremely few people will ever be subject to the surtax,” but there are two situations where it’s more likely to come into play for advisors and their clients.

According to Levine, situations that will trigger proposed surtaxes include:

• The sale of a large business or other asset, such as real estate;
• Trusts and estate distributions, where thresholds for the surtax are much lower (trusts will be subject to a 5% surtax at the $200,000 mark and estates will be subject to a 3% surtax at the $500,000).

“With the SECURE Act’s 10-year rule in play, it doesn’t take an astronomically large IRA to produce distributions of more than $200,000 a year,” Levine said.

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