Over the summer and fall, there has been a lot of talk about the tax legislation going through Congress. It’s called the Build Back Better Act. The legislation has gone through the House and now is in the Senate with some kind of passage expected by the end of the year. Last week, we talked about some income tax aspects of the plan. This week I want to look at some other potential changes.
There was a lot of retirement plan changes right?
- Yes and the largest change would be the elimination of the backdoor Roth. This is where people could contribute to non-deductible IRAs and then convert those contributions to a Roth IRA. They did this because their income was too high to contribute in the normal way. Hence the phrase backdoor Roth.
- This would begin in 2022.
- It would also eliminate a Roth conversion from Traditional IRAs or other employer sponsored retirement plans if a married couple’s income is over $450,000.
- Fortunately, this would not begin until 2032.
- It would also limit the amount that a person could have in their retirement accounts or even prohibit any new money into retirement accounts after 2028.
There are some cryptocurrency changes also right?
- Yes, it starts to treat them as regular investments which means they would be subject to the wash sale rules and subject them to the constructive sale rules beginning in 2022.
- This would make reporting a lot more complicated.
- Under the wash sale rules, if you sell a security at a loss, you may not be able to deduct the loss, depending on when you bought it originally or if you re-buy it within a certain time frame.
- If I am reading it right, the constructive sale rules would also add a lot of complexity since you may have report a gain or loss every time you use cryptocurrency to buy anything.
- If this passes, we will definitely need to talk about this further.
There are other items that can still sneak into the final bill also right?
- Yes, like we talked about last week, the tax rate could increase from 37% to 39.6%.
- The capital gain rate increase from 20% to 25%.
- There could be limitations on the Qualified Business deduction (up to 20% of business income) for higher income business owners
- Corporate tax could increase from 21% to 26.5%.
- And some other things
- Tax unrealized gains which have never been taxed before
- Or they could end the concept of the step up in basis upon someone’s death.
- We are definitely in some interesting times.
Be sure to talk to a tax professional if you have any questions about Retirement Plans.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
