Political Uncertainty Makes Planning Difficult, Panelists Say

By Doug Bailey

Changes in the U.S. Tax Code affecting everything from retirement savings, income surtaxes and qualified deductions are definitely coming soon, according to tax planning experts. But what they’ll look like and how much it might cost or benefit you is anyone’s guess right now as proposals in the President Joe Biden’s Build Back Better Act are mired in Congressional machinations and negotiations.

How the act will “Impact Your Client’s Planning Options” was the topic of recent webinar sponsored by Ameritas, in partnership with national law firm BakerHostetler. It was easier for participants to convey what won’t be included in the final bill than what will be.

“There are no corporate tax rate increases, there's no individual rate increases, there's no capital gains rate increases,” said BakerHostetler partner and former federal tax policy official Jeffery Paravano. “There's no changes in the estate and gift taxes. There's no bank reporting changes. There's no carried interest changes. All the stuff we studied all year are gone. And we don't think any of it is likely to come back.”

But there was consensus that the bill will pass in some form, although probably not before the holiday break.

“Tax reform, and this package that has been working its way through Congress, is really going to end up being a 2022 legislative accomplishment and very unlikely to be a 2021 legislative accomplishment because, of course, we are almost at the end of 2021 and there are fewer and fewer folks on Capitol Hill these days,” said Michael Ferguson, former congressman from New Jersey.

Ferguson said one of the most prominent sticking points is over state and local tax deductions – the so-called SALT deductions. The $1.75 trillion House version of the bill that passed in late November called for raising the deduction limit to $80,000 from the current $10,000 cap.

Since 2017, filers who itemize deductions can’t claim more than $10,000 for SALT, increasing levies for filers with high state income and property taxes.

The $80,000 limit would allow eligible filers to further reduce their taxable income.

“Progressives on the Hill actually align with conservative Republicans on this issue, because they view the deduction as a tax break for wealthy people,” Ferguson said. “But for districts like the one I used to represent in New Jersey, many in New York and California and elsewhere, that deduction is critical. And members of Congress from those areas are simply not going to vote for a final package unless there's something that addresses the SALT deduction issue.”

Paravano noted that while proposals to increase capital gains taxes are no longer in the bills, there are significant new surtaxes that apply to people selling businesses.

“The surtaxes are real for people who have high earnings or are selling businesses,” he said. “And they’ll also be retroactive. We've been trying to close a lot of deals by year end and that pressure is going to continue because even though the capital gains rate increases are gone, the surtaxes will kick in and they'll apply to things like the sale of a businesses and trusts.”

Currently the House bill prohibits rollovers from traditional IRA to a Roth IRA beginning in 2032, the experts noted. It also prohibits Roth conversions after 2021 that include any non-deductible contributions. But there’s no guarantee those elements will survive.

“We're watching this very closely,” Paravano said. “There has just been dead silence so far from the Senate side, so we don't know.”

The uncertainty makes planning difficult. However, BakerHostetler’s private client services team member Jonathan Forster said there are always some sure things.

“Anyone doing tax planning now, whether it’s to fund a trust or buy life insurance, these things are not going to get less expensive over time,” he said. “There are certainly going to be rate increases and tax reform. So anything that's rate sensitive, you might lock in a rate now when the rates are exceptionally low. They're not going to stay this low, no way.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].