Andy Friedman Weighs In on House Democrats' Tax Plan

However, Friedman said he believes that effective date “is going to slip; I think we are going to see an increase in capital gains and dividends taxes to see 25%, but I think we may get a little later effective date as the bill moves through Congress, perhaps when the Senate gets ahold of it. But right now, the proposal would have an effective date of yesterday and there’d be no way to take advantage of the lower capital gains tax rate.”

IRA Limits

The retirement plan proposals “are entirely new,” Friedman said. “None of them were in the Biden proposal.”

First, House Democrats’ plan “would prohibit further contributions to Roth or traditional IRA if the total value of an IRA exceeds $10 million as of the end of the prior taxable year,” Friedman explained. “That’s not the tough part. The tough part is that the legislation would also would require a distribution from the account to get it down to $10 million; that distribution would be 50% of the amount necessary to bring it down to $10 million. So if you have a Roth IRA, another IRA, combine them all together, more than $10 million in value, no more contributions — but also a taxable distribution of half of the amount necessary to get the account to under $10 million.”

Further, if the amount in an IRA exceeds $20 million, “the excess must be distributed right away,” Friedman said. “It has to come out right away to bring it down to $20 million.”

Mega backdoor Roth IRAs are eliminated, and no conversions to Roth IRAs are allowed “if income is over a certain amount,” Friedman said. Also, IRAs could not hold private placement investments.

Wealth Transfer

“To everybody’s relief … we’re not going to see a repeal of stepped-up basis. That was just too complex,” Friedman said. “The committee recognized that and went back to the traditional way of handling this by reducing the estate and gift tax lifetime exemption.”

The current exemption is about $11.5 million per person, Friedman said. House Democrats’ legislation “would reduce that back to $5 million per person, the amount we had before the Tax Cut and Jobs Act.”

Also, there’s “no increase in the 40% estate and gift tax rate” in the bill, he said.

The legislation also “goes on to attack certain sophisticated wealth transfer techniques that we have been using for quite a while,” like grantor trusts, Friedman said.

Corporate Tax Rate

House Democrats proposal would raise it to 28% from 21%. “My guess,” Freidman said, “is it will end up around 25% when it’s all said and done.”

Pictured: Andy Friedman of The Washington Update