Retirement, Death Tax, Bank Reporting Provisions Stripped From Reconciliation Bill For Now

Taxes

What tax hikes are in the social policy and climate change bill that Democrats are trying to pass by year-end? It depends what day it is. The latest version, a revised $1.75 trillion Build Back Better Framework, released today by the White House, is a pared down version of the earlier $3.5 trillion plan. It’s not just a matter of what’s in but what’s out. Here are links to the White House memo and the October 28th legislative text.

On the spending side, it’s an expansive program. There’s still free preschool for all, subsidized child care and home care, clean energy incentives including a $12,500 tax credit if you buy certain electric cars, even coverage for hearing aids under Medicare. The enhanced child tax credit is extended for one year; and refundability—meaning you get the credit even if you don’t owe taxes—is made permanent. What’s missing? Paid family leave and free community college.

How will this be paid for? The White House framework continues to seek revenue to pay for the plan through a combination of corporate tax changes and by taxing the rich. The three major individual tax changes are:

A new income surtax. A new surtax on the income of multi-millionaires and billionaires would apply to the wealthiest 0.02% of Americans. It would apply a 5% rate above income of $10 million, with an additional 3% surtax on income above $25 million. This is estimated to bring in $230 billion over 10 years.

A Medicare tax crackdown. The plan would close loopholes that allow high-income business owners to avoid paying the 3.8% Medicare tax on their earnings. This is estimated to bring in $250 billion over 10 years.

Limitations on business losses for the wealthy. This provision would permanently disallow business losses in excess of business income for non-corporate taxpayers and make excess business losses for a year subject to the limitation in the following year. This is estimated to bring in $170 billion over 10 years.

What’s been stripped out on the revenue side?

The small employer retirement plan mandate. A retirement plan mandate that would require employers with six or more workers in business for at least two years to automatically enroll their employees in Individual Retirement Plans or 401(k)-type plans appears to have been dropped. That would have raised money because employers who weren’t in compliance would have faced penalty taxes.

New retirement account contribution limits and new retirement account withdrawal mandates for folks with outsized retirement savings were also dropped. The first provision, which would have applied to married couples with taxable income over $450,000 or over $400,000 for singles, prohibited new retirement account contributions for taxpayers whose aggregate retirement account balance exceeded $10 million in the prior tax year. These same folks would have had to take a special minimum withdrawal (50% of the amount over $10 million) from their retirement account in the year following any year the balance exceeded $10 million. There were more complicated rules for those whose accounts exceed $20 million.

Also gone for now are provisions that would have eliminated backdoor Roth IRAs and mega-Roth IRAs.

Another pay-for, requiring banks and other financial institutions to report account balance information to the Internal Revenue Service to ferret out tax cheats, was also dropped. The Credit Union National Association said today that scrapping the IRS reporting provision from the reconciliation package was a “major win.”

On the estate tax front, the earlier House bill included provisions that would cut the estate tax exemption amount in half, eliminate the use of grantor trusts and modify valuation discounts—all to limit tax-free wealth transfers. “The estate tax, GRATs, and valuation provisions should be deep-sixed permanently,” says Palmer Schoening, chairman of the Family Business Coalition, a group that supports the repeal of the estate tax.

Don’t count on this latest version; it’s still a work in progress. “Taxwriters have shown a willingness to resurrect discarded pay-fors before, so we are not letting our guards down,” Schoening says.

Further reading:

Treasury Pushes Revised Bank Account Reporting Proposal As Way To Catch Rich Tax Cheats But Banks Fight Back

October Child Tax Credit Payments Hit Bank Accounts, With Downward Adjustments For Many Taxpayers

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