We feel that a sound wealth management plan focuses on making the most of the things that you can control (saving vs. spending, portfolio risk, education to enhance earnings potential and keeping care of your personal well-being/health), but also staying abreast of things outside of your control (Policy regarding taxation, savings & entitlements).
After digesting the White House proposed budget released in February we found several new tax ideas in the plan. While the likelihood of these ideas passing this year is very low we thought we would share them, as they include some very major changes in our opinion. We will only focus on the items that could affect our wealth management clients (individuals). Once again, these are only proposals! It does, however, give you a glimpse into the future of tax items on the table.
The following are the proposed changes we thought would be of greatest interest:
- Reduce The Value of Itemized Deductions. The Administration proposes to limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28%. This limitation would reduce the value of the specified exclusions and deductions that would otherwise reduce taxable income in the top three individual income tax rate brackets of 33%, 35%, and 39.6% to 28%.
- Capital Gains and Qualified Dividend Tax Increase. Under the proposal, the 20% capital gains and qualified dividend tax rate would be increased to 24.2% (for a total of 28% for gains also subject to the 3.8% net investment income tax).
- Implement the Buffett Rule A New “30% Fair Share Tax”. The Administration proposes a new minimum tax, called the Fair Share Tax (FST), for high income taxpayers. The final FST is the excess, if any, of the tentative FST over the sum of the taxpayer’s: (1) regular income tax (after certain credits) including the 3.8% net investment income tax, (2) the AMT, and (3) the employee portion of payroll taxes. The set of certain credits subtracted from regular income tax excludes the foreign tax credit, the credit for tax withheld on wages, and the credit for certain uses of gasoline and special fuels. The tax is phased in linearly starting at $1 million of AGI ($500,000 in the case of a married individual filing a separate return). The tax is fully phased in at $2 million of AGI ($1 million in the case of a married individual filing a separate return). The threshold is indexed for inflation beginning after 2017.
- Require Non-Spouse Beneficiaries of Deceased IRA Owners and Retirement Plan Participants to Take Inherited Distributions Over No More Than Five Years. Heirs who are currently designated as beneficiaries under IRAs and qualified retirement plans may receive distributions over their lifetimes, no matter what the age difference between the deceased IRA owner or plan participant and the beneficiary. The Administration proposes to require non-spouse beneficiaries of IRA owners and retirement plan participants to take inherited distributions over no more than five years. Exceptions would be provided for disabled beneficiaries and beneficiaries within 10 years of age of the deceased IRA owner or plan participant.
- Limit Roth Conversions to Pre-Tax Dollars. This would close the “Back-Door” Roth IRA option that we utilize for some clients.
- Placing Restrictions on Individuals with Large Retirement Plan Balances. Contributions would be barred for individuals who have total retirement plan assets in excess of $3.4 million in IRAs, 401(k)s, 403(b)s and the like.
- Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009. This would be a material change to the current structure. Under current law, estates, gifts, and GSTs are taxed at a maximum tax rate of 40% with a lifetime exclusion of $5.45 million, indexed for inflation after 2011. The Administration proposes to restore and permanently extend estate, gift, and GST tax parameters as they applied for calendar year 2009. Under those parameters, estates and GSTs would be taxed at a maximum tax rate of 45% with a life-time exclusion of $3.5 million. Gifts would be taxed at a maximum tax rate of 45% with a lifetime exclusion of $1 million. These parameters would be effective for the estates of decedents dying and transfers made after December 31, 2016, and would not be indexed for inflation.