TAX UPDATES FROM THE WAYS AND MEANS COMMITTEE – WHAT FAMILY OFFICES SHOULD KNOW

Congress is picking up speed and hashing out the 2022 budget details. 

The House Ways and Means Committee yesterday issued its version of new taxes needed to support the funding priorities.  Highlights are that Biden’s proposal to turn gifting and death into realization events has been scrapped and his addition of a new, 39.6% tax rate on capital gains once AGI exceeds $1 million has been modified.  In their place, new taxes have been proposed. These include:

  • lowering the income amount on which the 39.6% ordinary income tax rate is applied
  • replacing the current 20% capital gains tax rate with a 25% capital gains tax rate
  • reverting to the $5 million lifetime estate tax exemption (indexed for inflation) as of 2022 rather than 2026, and
  • adding a 3% surcharge tax on income in excess of $5 million.

Furthermore, Congress is proposing major changes to retirement savings.  New laws would limit retirement account balances and end the popular back-door Roth contribution strategy.

Below is a list of changes to the retirement regulations and the chart summarizing major tax changes.

Changes to Retirement Accounts

  • Contribution Limits: Additional contributions to IRAs would be prohibited once the combined account balances, including defined contribution plans, exceeds $10 million.  This applies only to taxpayers with taxable income in excess of $450,000 for married filing jointly (MFJ), $400,000 for single taxpayers or $425,000 for heads of household.  (These amounts are indexed for inflation.)

  • Increased minimum required distributions for large account balances: If a taxpayer’s combined IRAs and defined contribution accounts exceed $10 million and taxable income exceeds the amounts above, then there will be a required minimum distribution of 50% of the amount in excess of $10 million.  Additional requirements will be imposed for combined accounts in excess of $20 million.

  • Eliminate back-door Roth contributions: Roth conversions will not be allowed for taxpayers with taxable income in excess of $450,000 for MJF, $400,000 for single taxpayers, or $425,000 for heads of households.

  • After-tax contributions prohibited: After-tax contributions will be prohibited for qualified plans.  Roth conversions from after-tax IRA contributions will be banned for all income levels.

Please note that this is a fluid process, and the final version of the budget might be different than what is summarized here. However, it is important to consider whether you might be impacted by the proposed changes. If so, review the above considerations with your financial and tax advisors and develop an appropriate plan of action.

For information, contact Monica Jalife, CFA, CFP at Pinnacle Associates, Ltd. at 212-652-3250  or [email protected]

This commentary is limited to the dissemination of information pertaining to Pinnacle Associates, Ltd. (“Pinnacle”) and general economic market conditions.  Nothing contained herein should be construed as personalized advice, or an offer or solicitation to buy or sell any securities.  Past performance is not indicative of future results, and there is no guarantee that the views and opinions expressed in this commentary will come to pass.  Pinnacle is neither a law firm nor an accounting firm, and no portion of this commentary should be construed as legal or tax advice.  You are advised to consult with separate legal or tax advisors with respect to any legal or tax advice.  Pinnacle is an investment adviser registered with the SEC.  For information pertaining to the registration status of Pinnacle, please refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Pinnacle, including fees and services, send for our written disclosure statement as set forth on Form ADV Part 2A