Through tax rule changes, President Biden and his allies in Congress are taking aim at high earners and the wealthy in general. Their tax increase proposal is being called the Build Back Better Act (BBBA).
That’s a bit of a misnomer, however, since the non-partisan Tax Foundation Equilibrium Model found that as proposed, the Build Back Better Act would:
- Suppress GDP by 1% per year over ten years
- Cost 303,000 full-time jobs
- Reduce the after-tax income of 80% of all taxpayers
The language surrounding the Build Back Better Act suggests that it’s time for the rich to “pay their fair share.” But it is important to remember that 61% of all Americans pay no taxes. This vulnerability was addressed over 190 years ago, when Alexis de Tocqueville warned that the eventuality of non-taxpayers voting for the taxation of others would ultimately be America’s undoing. But don’t lose heart. We have been on such a brink before, and we voted in low-tax Ronald Reagan as a result.
The biggest relief in all this is the apparent demise of the proposal to rescind the Step-up in Basis Rule. This rule, which currently allows for forgiveness of all capital gains taxes at any owner’s death, was an early centerpiece of Mr. Biden’s tax priorities. If Congress rescinded the current rule, our firm’s clients would suffer a significant effect, as they collectively own securities with more than $400 million in untaxed gain. We manage our client money in a manner targeted explicitly at maximizing untaxed gain, with the hope of it someday being tax-free.
Tax Rule Proposals
Still, there are dozens of tax rule changes up for discussion, and it’s worth noting that previous proposals have already been shrunk, died, or been negotiated into oblivion. I wrote here months ago that political theater requires its actors to throw every possible conception into the mix as bargaining chips in order to negotiate for lesser stakes as the deal takes shape.
The proposals that still have legs that will be of particular interest to our investors have to do with IRAs and Roth IRAs. Apparently, Peter Thiel’s $5 billion Roth IRA has gotten under the IRS’s skin; they missed out on taxing the growth of his $2000 investment in non-public PayPal stock because it was placed in a Roth. Incensed, Congress now proposes that Roths should be prevented from investing in private equity where the gains can be most significant. This topic also came up years ago when Mitt Romney ran for president and seemingly disclosed a $100 million Roth IRA with a similar story.
Additional IRA restrictions are being proposed to limit IRAs to $10 million. These are so rare that the proposal hardly seems worth the ink to write it, but it makes clear who it is that congress finds contemptible. Congress is also marauding with the proposed Global Intangible Low-Tax Income act, now called GILTI. Wow, somebody really has a burr under their saddle. GILTI is aimed at companies that manage to structure in such a way as to legally diminish their taxes below a certain rate. GILTI creates a net to grab its “share”.
Backdoor Roths face scrutiny as well, since Roths are intended for lower-income individuals. Nevertheless, current rules allow the wealthy to obtain them via conversions of IRA to Roth. This presents a catch 22 for the IRS; they love the taxes paid on conversions while detesting the wealthy getting ahead afterward. Accordingly, there is a discussion pending to implement an income limit for Roth conversions.
Stay tuned, as these proposals head for further negotiation. However, any inkling you have toward creating a grantor trust or doing a Roth conversion would be best considered sooner rather than later.
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