Marcum 2021 Year-End Tax Guide

Limitation on Excess Business Losses Made Permanent: The Tax Cuts and Jobs Act’s limitation on the use of excess business losses for non-corporate taxpayers (which was suspended for 2018, 2019, and 2020) was scheduled to terminate after 2025. This provision disallows the current use of losses that exceed $524,000 for 2021 for joint filers and $262,000 for 2021 (inflation adjusted) for other filers. The unused losses become part of one’s net operating loss carryover to the following year. The Build Back Better Act proposes two changes to this rule. The limitation would be made permanent. Additionally, the unused current portion of the losses would not become part of the taxpayer’s net operating loss carryover, but would retain its character as business losses and would be carried over and added to the following year’s business losses to determine that subsequent year’s limitation. Child Tax Credit: As noted above, ARP enhanced the child tax credit solely for 2021 and created the advanced payment mechanism to provide taxpayers with the benefit of the credit during the tax year. The current Build Back Better Act makes the following proposed changes to the credit: • The credit will be extended for one additional year (2022). • The IRS will make advance payments for 2022, but the monthly payments will be for the entire year (1/12th each month). The Secretary of the Treasury is to establish a program to accomplish this. Additionally, unlike 2021, the advance payments will be made only to taxpayers with modified adjusted gross income below $150,000 for joint filers; $112,500 for head of household filers; and $75,000 for other filers. • The child tax credit for 2022 will be fully refundable. Earned Income Tax Credit: The improvements made under ARP are extended for one year to 2022. The prior House bill had proposed to making the changes permanent. RETIREMENT PLAN MODIFICATIONS The current version of the bill includes many retirement provisions which had been eliminated in previous drafts. This would include: • Limitation on IRA contributions for high-income taxpayers: Additional contributions to a Roth or traditional IRA would be banned if the total value of the

IRA and defined contribution retirement plans exceeds $10 million as of the end of the prior tax years, and the taxpayer is a high-income earner – i.e., a single taxpayer or married separate taxpayer with taxable income over $400,000, joint filers with taxable income over $450,000, or head of household filers with taxable income over $425,000 (all amounts subject to inflation adjustment after 2022). • Increase in required minimum distributions (RMD) for high income taxpayers with large retirement account balances: » An additional RMD rule is created requiring a minimum distribution when an individual who is a “high earner” has a traditional IRA, Roth IRA, and defined contribution retirement account balances that, in total, exceed $10 million at the end of a tax year. In that case, an RMD would be required in the following year. The income levels to be considered a high-income taxpayers are the same as for the limitation on IRA contributions (discussed above). » The RMD is generally is equal to 50% of the amount by which the aggregate account at end of prior year exceeds the $10 million limit. » If the combined account balances (IRA, Roth IRA, DC retirement accounts) exceed $20 million, the excess required to be distributed from the accounts is the lesser of (1) the amount needed to bring the account down to $20 million or (2) the amounts in the Roth or designated Roth account. This is a requirement to take the reductions out of the Roth accounts first. The balance of the 50% RMD can be taken from the accounts at the decision of the holder. • Rollovers: The law would prohibit a “backdoor” Roth contribution by using a conversion to a Roth to avoid the Roth contribution income limits for high-income taxpayers (with taxpayers at the same thresholds as in item #1 above) for tax years beginning after December 31, 2021. • Limitation of Conversions to Roth accounts: The law would prevent conversion of pre-tax amounts to Roth accounts for high earners. This provision would be effective after December 31, 2021. However, the limit on conversions of pre-tax amounts has an effective date after December 31, 2031.

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