tax planning

How the Latest Biden/House Tax Proposal Affects Millionaire Retirees

The current version of the Build Back Better plan shouldn’t be that scary for retirees with a net worth of $1 million to $5 million. In fact, there could be a pleasant surprise or two for them.

Back in November 2017, I did a deep dive into the House version of the Tax Cuts and Jobs Act (TCJA). It’s hard to identify anything I’ve done that was a bigger waste of time. The final version of the bill signed into law by former President Trump had almost no resemblance to its initial form. Today the Build Back Better proposal has also gone through multiple twists and turns — and probably will continue to do so. This time, however, the House version is more likely to be close to its final form. As I write, it is also possible that this will play out in the Senate in January. Happy New Year!

Here’s the good news for the wealthy: If you have $1 million to $5 million, this bill is not going to have a significant impact on your finances unless you are about to sell a business or hit the lottery. But here are three items still in the bill that you should be aware of: 

1. Increase of the SALT deduction

Unlike the many tax hikes in the bill for the wealthy, this provision is likely to reduce your taxes. The TCJA put a cap of $10K on the amount of state income taxes and personal property taxes you can deduct. In high-tax, high-property-value areas, this cap significantly reduced the amount of itemized deductions you could claim. This bill raises that cap to $80K. That’s great news for retirees who live in valuable homes or have significant retirement income subject to state income taxes.

Example: If your itemized deductions increase by $10K due to the SALT cap expansion, your taxable income will drop by the same amount. Your tax bill will decrease by your [marginal rate * $10K]. So if you were in the 32% marginal tax bracket, you would owe $3,200 less in taxes.

2. Wash sale rules would apply to cryptocurrencies

My mom, who is in her 70s and largely hands-off with her investments, inquired about Bitcoin earlier in the year. That was my sign that cryptocurrencies are here to stay, and we know that many of our clients are investing in them. What I think many retirees don’t realize is that there is a way to take advantage of a current loophole until (if) this bill is passed.

Cryptos are extremely volatile. If you have a bad Bitcoin day, you can sell your position, claim the loss on your tax return, and reinvest the same or next day. With stocks, bonds, mutual funds, etc., you must be out of that position for more than 30 days to be able to claim that loss.

Many experts think that this contributes to the volatility of the asset class as there is actually a tax advantage to selling when everyone else does, leading to self-perpetuating volatility. Should the Build Back Better plan as currently written pass, cryptos will follow the same wash sale rules as other publicly traded securities.

3. Reduced estate exemption (but not until 2026)

Full disclosure: This reduction actually stems from the expiration of the TCJA, not as part of the Build Back Better act. I imagine this all seems like Greek, but, as a refresher, the exemption is the amount you can pass to beneficiaries without owing federal estate tax. The TCJA doubled this amount from roughly $5.5 million to $11 million per person, meaning that very few people have to worry about it. Many of the earlier versions of Build Back Better accelerated the reduction. However, the latest version does not.

Assuming that the estate tax exemption in the final bill is exactly what the House passed, the reduction of the exemption amount would come in 2026. While the vast majority of Americans would still be just fine, many of you may not be. When you add your home, your investments, etc., that number can climb quickly. Add compounding interest for the next 20 years and you may need a different level of estate planning.

Bottom line: This bill has been defanged for almost all but the uberwealthy. If you’re wondering why Elon Musk is selling Tesla stock, it’s not because of a Twitter war with Bernie Sanders; it’s because he’s betting his tax bill will be lower today than in the future. For those like Elon, it’s a safe bet. The rest of us need to wait and see.

About the Author

Evan T. Beach, CFP®, AWMA®

Wealth Manager, Campbell Wealth Management

Evan Beach is a Certified Financial Planner™ professional and an Accredited Wealth Management Adviser. His knowledge is concentrated on the issues that arise in retirement and how to plan for them. Beach teaches retirement planning courses at several local universities and continuing education courses to CPAs. He has been quoted in and published by Yahoo Finance, CNBC, Credit.com, Fox Business, Bloomberg, and U.S. News and World Report, among others.

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