The September 13th tax proposal included numerous tax changes that could directly impact many of our clients.  The Build Back Better framework, released by the White House last week on Thursday, October 28th, removed many of the initial provisions including the attack on backdoor and mega-backdoor Roth conversions.

The tax proposal released last week would include two key tax changes:

  1. Net Investment Income Tax (NIIT) would apply to S Corp profits if the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $400,000 for a single filer ($500,000 for married filing jointly.)  The current NIIT of 3.8% does not currently apply to S Corp earnings but would apply if the bill passes.
  2. The proposed “Surtax” threshold has now been increased to taxpayers with MAGI over $10 million.  A surtax of 5% would apply to income over $10 million and an additional 3% (total of 8% = 5% + 3%) would apply to MAGI over $25 million. 

Increased capital gains and ordinary income tax rates, targeting of Roth accounts, a reduced estate tax exemption, extension of the child tax credit past 2022, and strict limitations on grantor trusts were all absent from the released draft.

However, just as Roth accounts were taking a sigh of relief… as of November 4th the latest tax proposal being passed around has reinstated scrutiny on retirement accounts. This week’s latest round of proposed tax legislation introduces a few more key changes:

3. Retirement savers with large account balances could face additional scrutiny and required minimum distributions. IRA accounts will be prohibited from holding any securities if the issuer requires a certain minimum level of assets or income. Individuals with combined account balances more than $10 million will face required minimum distributions of 50% of the amount that exceeds $10 million. This will apply to taxpayers above certain income thresholds ($400k individual, $450k for a joint return.)

4. Beginning after 2028 further contributions to Roth or traditional IRAs will be banned for anyone with account balances exceeding $10 million who also has income above $400k ($450 for a joint return.)

5. Back door Roth contributions would be disallowed starting in 2022 regardless of income level. The back door may officially be closed at the end of this year.

6. Limits on Roth conversions are back starting after 2031.  This limitation would impact taxpayers with income over $400k ($450k for a joint return.)

Based on the back and forth over the past week, it is hard to say what will actually make the final bill. The roller coaster ride continues, but we will make sure to stay on top of the proposed changes as the conversations continue.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.   It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.

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