If you’re looking for insight into America’s legislative process, consider the wisdom of the Three Rules of Mountaineering.
“It’s always further than it looks. It’s always taller than it looks. And it’s always harder than it looks.”
Yet mountaineers summit and proposals become law. On November 19, the House of Representatives passed its version of the Build Back Better Act.
After months of public debate, uncivil haggling, and backroom mischief – that’s how she gets done – President Joe Biden’s spending and tax plan, his multi-trillion-dollar baby – has a date with destiny: reconciliation with the Senate’s bill once it is hatched.
We cannot predict the bill’s final form, what it will mean for citizens, both moneyed and ordinary – or planners of taxes, estates and investment. At long last, though, we know what House Democrats want – we see that clearly, now. Allow me to lay out the salient items.
There was a bit of a hiccup before the vote. The Congressional Budget Office issued its report on BBB’s cost: $1.7 trillion. The deficit should rise over a decade by $367 billion, a bit of a stinker, since President Joe said the cost would be zero, somehow. Congressmen found a bright spot: the bill’s passage could add $207bn in new tax revenue in the period, so the real deficit boost is only $160bn.
Based on my cack-handed calculations, the BBB bill will cost $323,439,878.23 per minute over the next year. Yet the final deficit rise is just $30,441,400.30 per minute per year for ten years – well, that sounds manageable, if we can trust my long division. All in favor, say ‘aye’.
Alas, so runs Congressional reasoning, I suspect. And so it turns out, Joe’s free lunch is just like any other.
I was talking about the bill with a colleague, who barked: “Skip the boring stuff, get to the sexy.” She meant the tax hikes and new estate, tax and planning rules. We shouldn’t judge adult predilections; after all, these are our bread and butter issues. Yet there’s no denying: some folks are plain kinky.
Let’s wallow in her sin a bit. The SALT cap will be stovepiped to $80,000 ($40k for married separate filers, as well as trusts and estates), up from the Trump-era limit of $10,000. I wrote about this oddity a few weeks ago (Send Snow Shovels to Hades – Democrats Propose Major Tax Benefit for the Wealthy), so stroll over there for the peculiar details.
The new SALT provision helps wealthier taxpayers, slapping the face and challenging ‘pistols at dawn’ to the spirit of President Joe’s proletarian ethics. That’s how Senator Bernie Sanders took it and his pushback limited the damage, or blessing, depending if you’re reading from a barricade or a beach house.
A major Democratic plank made the final cut: a 15% minimum profit tax on large corporations. These top-hatters are defined as companies reporting north of $1 billion in annual profit. The rules are arcane and soporific, good news for tax attorneys of my acquaintance. You know the drill: congressmen are lawyers; they feed their own.
Taking aim at the same suspects, the legislation adds a 1% surcharge on corporate stock buybacks, a clear case of ‘you’re not doing anything wrong, carry on; we just want the money’. In tandem, a host of new rules to prevent corporations from avoiding US taxes by parking assets and headquarters overseas. Internationalizing corporate taxes is the wave of the future and this is likely the first swell of warning.
Wealthy taxpayers may feel a similar sting. Section 1A backhands high-income individuals, estates, and trusts with a 5% surcharge on adjusted gross income over $10 million, and slaps on a tearful topper-upper of 3% for sums north of $25 million. My cheeks are secure, I’m well under the limit – are yours glowing yet?
Now that we’re warmed up, let’s bring on the marquee act: changes to retirement planning. Under the bill, contributions to Roth and standard IRA accounts would be banned if they take the aggregate value beyond $10 million. This rule applies to individual taxpayers with annual incomes over $400,000 ($425k for heads of households; $450k for married couples filing jointly), as per the new normal.
At the end of a tax year, if the combined value of one’s defined contribution plans exceeds $10 million, and that $400k income limit applies, a required minimum distribution must be taken the next year, sufficient to reduce the balance to the ten-million threshold. The sad connotation: a potentially hefty tax bill for any wealthy retirees forced to take these RMDs on top of their normal retirement incomes.
The only bright spot for better-off taxpayers: these provisions would go live only on January 1, 2029, leaving time to make strategic adjustments.
Never mind the rich: ordinary taxpayers may suffer. For all wage earners, after-tax contributions to qualified plans or IRAs can no longer be swapped into Roth IRAs. Seconds out for the backdoor and mega-backdoor IRA strategies: your champions have taken a bullet. This provision will become active on January 1, 2022, if it makes the final bicameral bill.
If all these provisions become law, and I’m betting they will, adjusting to the new tax and planning regime will be tough.
Yet as eccentric film director Werner Herzog observed, “Every man should pull a boat over a mountain once in his life.”
When he did it for artistic cinema, Werner’s crew plotted his murder. There is nothing here so dire, as the new laws can only cost hard-earned money; it will just feel like blood as it drains away.
I am ever sanguine, always hope for the best. Yet I prefer action, so here’s your prewrapped New Year’s resolution: ‘I will talk to my tax team and retirement advisors. I will make them fast friends, really get in their hair’. There’s always a way – just let them find it. Draw a well-earned breath over the holidays, but then, step lively.