By Brown Armstrong CPAs
On November 3, 2021, House leaders released a revised reconciliation bill (H.R. 5376) for the Build Back Better Act, which includes several proposed tax changes. As of today, this law has not passed the Senate.
Some important items to watch as this legislation proceeds:
Expansion of the 3.8% Net Investment Income Tax
This is what we like to call a “stealth” tax. To see if it applies to you, check your 2020 tax returns for form 8960.
Since 2013, the 3.8% tax has applied to interest, dividends, and capital gains, as well as profits from passive pass-through entities. H.R. 5376 extends the pass-through entity component to include any pass-through income if that income has not been subject to self-employment tax. The inclusion would be only for taxpayers making more than $400,000 ($500,000 if married.)
SALT Deduction Cap
Most California taxpayers are now familiar with the State and Local Tax (SALT) cap of $10,000 which took effect in 2018.
Several states, including California, have passed laws to work around the SALT cap. California’s version of this workaround is AB 150—the Pass-Through Entity Elective Tax. If you receive a share of income from a pass-through entity, it is possible that this workaround will benefit you. The election must be made by the pass-through entity (not the individuals), so work with your fellow partners, members, or S corporation shareholders, as well as your tax preparer to evaluate whether this option will work for you.
Just to make this interesting: there is a provision in California AB 150 that automatically repeals the workaround if the federal SALT cap is repealed at the federal level.
So, where do we stand with SALT repeal at the federal level?
The stalled H.R. 5376 increases the cap to $80,000 but does not repeal it. Barring complete repeal, the California workaround will result in considerable tax savings for many taxpayers.
The lifetime estate and gift tax exemption will increase to $12.06 million per individual which is up $360,000 from 2021.
An early version of the Build Back Better Act included an early rollback of the exemption (it is scheduled to be cut in half beginning in 2026). However, this cutback was dropped from the latest text of the bill.
For the first time since 2018, the annual gift tax exclusion will increase from $15,000 to $16,000.
Keep in mind that direct payments of education and medical expenses are outside of the annual gift tax exclusion.
California repealed its estate tax many years ago, but seventeen states have some form of estate or inheritance tax. In some of those states, the exemption is zero—meaning the first dollar of an inheritance is taxed. Make sure to check before you move.
Mandatory CalSavers Employer Enrollment
While this is not technically a tax topic, the final phase of mandatory enrollment is open, and the enforcement of the law is underway. California has joined twelve other states with state-mandated retirement plans.
Employers with five or more employees are now required to register with CalSavers. The deadline for enrollment is June 30, 2022. Previous deadlines for employers with more than 50 employees have passed, so if you missed the deadline, enroll now to save the considerable penalties.
CalSavers requires all employers with five or more employees to withhold retirement plan contributions from their employees’ paychecks. An employer is exempt from this requirement only if the employer sponsors a retirement plan.
The response of many employers has been to sponsor new retirement plans, and there are many options, including some low-cost local group plans. Joining a group of employers to share the costs of the plan is an excellent option in some cases.
Based on past experiences, some of our clients do not want to take on the burden of sponsoring a plan at all. If you are facing this decision, take some time to consider the advantages of CalSavers.
Here are three common situations which can lead to frustration with employer sponsored plans. CalSavers is designed to shift responsibility to the employee and away from employers.
Situation #1: Employee turnover is high, and some employees have no permanent address. With an employer-based plan, the employer has the responsibility of keeping track of (current and former) employees’ addresses. When a former employee cannot be located, the employer must complete a series of complicated steps to track them down.
CalSavers solution: Each employee’s account is held by CalSavers and maintained by the employee, not the employer. The burden of tracking former employees is shifted to CalSavers, and the employer has no responsibility once the employee has left.
Situation #2: Employees are motivated to leave their jobs for the sole purpose of receiving plan payouts. With an employer-based plan, employees generally can only receive payouts by leaving.
CalSavers solution: The availability of money from CalSavers is unaffected by employment. Money can be withdrawn at any time by participants. Some of the withdrawals may be subject to tax and penalties.
Situation #3: Employees hesitate to sign necessary forms and have trouble understanding plan options. With an employer-based plan, documentation and communication responsibilities fall to the employer.
CalSavers solution: If the employee does nothing, the plan contributions kick in automatically. The only obligations for the employer are 1. uploading employee information into the CalSavers’ system; 2. deducting the required percentage from each paycheck; and 3. sending the funds to CalSavers.
The CalSavers website (CalSavers.com) has complete information for employers and employees in ten languages.