Not All Christmas Presents are Welcome: Four Potential Tax Changes to Monitor

Good to Know

Let’s face it—it may be easier to handicap who’ll win the Presidency in 2024 than to forecast how, or even if, your taxes will change over the next few months. This blog will point out a select few areas that could change your tax landscape dramatically, including:

  • Paying more capital gains tax,
  • More in the SALT deduction,
  • Cryptoassets under fire, and
  • Roth roadblocks.

Paying More Capital Gains Taxes

When a client dies, certain of their assets currently qualify for a step-up in income tax basis to fair market value at the date of death. For example, assume your client purchased 1,000 shares of Amazon at an equivalent of $500/share many years in the past (total purchase price $500,000). Those 1,000 shares have a market value of over $3,500,000 as the author writes this blog. Further, assume that your client died tomorrow and left the shares to one heir.

  • Under current law, the heir would receive a step-up in income tax basis of the shares to fair market value at death, without limit. That means the heir could sell the shares and pay no capital gains tax on the appreciation while the shares were owned by the decedent. The potential capital gains tax savings would be as much as $600,000 (20% x the $3M appreciation).
  • Under one of the proposed tax changes, the step-up in income tax basis would be limited to $1,000,000. What exactly would that mean to the heir in our example? Now the heir would recognize long-term capital of $2,000,000 instead of $0. Only $1,000,000 in appreciation would avoid long-term capital gains tax. This one tax change would cost the heir $400,000 in capital gains tax.

Capital gains taxes may also rise dramatically even when no one dies. One proposal would almost double the long-term capital gains rate from 20% to almost 40% for higher-income taxpayers.

More SALT Please

The annual state and local tax (SALT) deduction for Federal itemized deduction purposes is currently limited to $10,000. One proposal calls for raising this itemized deduction limit to $80,000 per year through 2030 and making the higher deduction limit retroactive for 2021 Federal income tax returns.

Cryptoassets Under Fire

Cryptocurrencies are in the cross-hairs of our Federal government once again. Editorially, do you think the Feds smell unreported income and more tax dollars to collect? So far this year, an increased number of parties, including crypto miners and developers, have reporting responsibilities. There’s one more log being heaved into the crypto-reporting fireplace as well—failure to report certain cryptocurrency transactions, including an invasive level of individual information, would be a felony if the proposed legislation is passed.

If that were not enough, proposed legislation would make crypto transactions subject to the wash sale rule.1 Currently, such transactions are not subject to the wash-sale rule. If the legislation passes, there will be no more selling crypto for a loss in December, recognizing the loss in the December tax year, and buying it back in January!

Roth Roadblocks

Current proposals include shutting down new backdoor Roth IRAs,2 eliminating mega-backdoor contributions to Designated Roth Accounts in 401(k) plans,3 and eventually even (counterintuitively) eliminating the Roth IRA conversion.

 

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide Social Security, retirement, tax, legal, insurance, investment, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.