Are Tax and Retirement Law Changes on the Horizon?

June 14th, 2021 by Jim Allen

With a new President and Congress in place, and the COVID pandemic appearing to finally wind down, attention is now being focused on new tax legislation. The financial media has been pushing a narrative that major tax increases are on the horizon, and this is causing unnecessary concern among our clients.

1. To start, the tax increases proposed by President Biden are simply proposals and there is great uncertainty about any of the proposals becoming law.
2. Next, when they are introduced in Congress, there will likely be substantial changes or even elimination of some of the proposed provisions. Rest assured, that we are monitoring all the tax proposals and will keep you informed of any progress on them.

There are currently two proposed tax law bills you should be aware of. The first, The Secure Act 2.0, is actually in Congress and has bi-partisan support. It focuses on retirement plan changes and contains some very beneficial provisions. The second (and the one getting all the press) is President Biden’s American Jobs and American Families plans. At this point, they are merely proposals and have yet to be introduced in Congress. Listed below are some of the more important tax law changes in both:

Retirement Planning Changes in Secure Act 2.0

• Changes the age for starting required minimum distributions (from retirement accounts, like IRAs) from 72 to 75 over the next 10 years. This will change gradually with the age increasing to 73 in 2022, increasing again to 74 in 2029, and finally changing to 75 in 2032.

 

• Would increase the 401(k) and other retirement plan catch up limits to $10,000 for participants that are ages 62-64. SIMPLE plans will have a $5,000 catch-up amount. The current catch-up limits are $6,500 for 401(k)s and $3,000 for SIMPLE plans.

 

• Employer matches can be made as a Roth contribution. Currently all regular 401(K) and other plan matches as made to the pre-tax portion of the plan. The new law would allow employer matching contributions to be allocated to the Roth portion if the plan has such an option.

 

• Student loan payments can be matched with a retirement plan contribution by their employer. This unique and very attractive provision would allow an employer to make a contribution to the employee’s retirement plan equal to an amount they paid towards student loan debt. There will be limits on a maximum contribution, but this would allow employees to pay down their student loans while having funds contributed toward their retirement.

The Secure Act 2.0 provisions are winding their way through Congress, and if enacted, would be effective Jan 1, 2022. There is bi-partisan support for the legislation so there is a fair likelihood that some of the bill’s provisions will be passed this year.

President Biden’s Proposed “American Families Plan”

Unlike the Secure Act 2.0, which is actual legislation in Congress, President Biden’s American Families Plan is simply a proposal and many of the provisions may never be passed. The proposed changes mainly affect high income earners (those with incomes above $400,000) and those with large capital gains. Many of the provisions on capital gains could be troublesome for high income earners if passed as is.

 

• Increase the top tax bracket back to 39.6%. With the TCJA (the Trump tax changes), the top personal bracket was dropped from 39.6% to 37% for those with income over $628,300 (for joint filers). The President’s proposal would raise the top bracket back to 39.6% for joint incomes starting at $509,300 (for joint filers) and adjusted for inflation. None of the other lower tax brackets would be affected.

 

• Raise long-term capital gain rate to 39.6%. This proposed change would make the long-term capital gain rate for those with incomes over $1,000,000 equal to the top ordinary income rate. Currently, the top long-term capital gains rate is 20% (plus the 3.8% NII tax, so it is actually 23.8%). Under the new rule, the long-term capital gain rate would equal the top tax bracket for income amounts that exceed $1,000,000. When you add in the 3.8% NII tax, the capital gains rate would increase from 23.8% to 43.4%. Should this proposal become law, additional planning will become critical for situations like the sale of a business or highly appreciated real estate.

 

• Proposed changes to tax deferred real estate sales under IRS §1031. Section 1031 exchanges are a common and popular way to sell a piece of real estate and purchase another while deferring the gain on the sale of the property. Under the new proposal, §1031 exchanges would still be allowed, but the maximum amount of gain that could be deferred would be $500,000 for single files and $1,000,000 for joint filers.

 

• Capital gains would be recognized for assets owned at death or given away while alive. This proposal would be a dramatic departure from current tax law as gains are not currently recognized when an asset is transferred at death or as a gift. Under the current law, most non-retirement plan assets (stocks, real estate, businesses) receive what is called a “stepped up basis” at death. When someone inherits a stepped-up basis asset, the only taxable gain is on any appreciation from the date of death. Plus, if you give away an asset while alive, your cost basis is carried over to the recipient of the gift and they don’t recognize any tax until they sell the asset. Under this proposal any gifts or bequests that exceed a $1,000,000 exclusion would become taxable upon death or gift.

If it becomes law, this change will create a variety of issues such as having a liquidity need to pay tax on the gain at death or gift, and from a record keeping standpoint in terms of tracking cost basis. One of the reasons the tax code provides a stepped-up cost basis is because it becomes very difficult, if not impossible, to track a person’s cost basis on certain assets over a lifetime.

At Anchor Bay Capital, we specialize in providing tax advice and return preparation as part of our comprehensive financial planning approach. We have in-house credentialed and licensed tax professionals who work hard to minimize taxes and maximize after-tax returns. Our motto is: “It’s not what you make, but what you keep that counts.”

Please mark your calendars for August 4^th at 6 pm to attend a special webinar and update on these tax law changes and how they may impact your financial plan. A detailed announcement on the webinar will be released soon.

Jim Allen, CFP, ChFC, EA, CDFA is the President, Sr Advisor, and a Principal at Anchor Bay Capital. He is an Enrolled Agent (EA) admitted to practice before the IRS. In addition to his 30 years of financial planning experience and his professional credentials, he holds a master’s degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.” Jim can be reached at [email protected]