Four Important Tax Changes in the Proposed Budget for 2017

The new budget proposal calls for $4.1 trillion in spending and would increase the national debt from around $19 trillion to $27.4 trillion over ten years, according to the Office of Management and Budget. It provides some insight into possible changes that might affect retirement savings and small businesses.

Three of the tax changes relate to retirement savings, and the last concerns small businesses.

Backdoor Roth IRA

Under current rules, single people or married couples filing a joint tax return cannot contribute to a Roth IRA if modified adjusted gross income reaches $131,000 and $193,000, respectively. Since 2010, however, when Congress ended income limits on Roth IRA conversions, higher earners have been able to sidestep the income limits. High-earning individuals were disqualified from opening a Roth IRA and making a direct contribution, but could convert a traditional IRA to a Roth IRA, known as a Backdoor Roth IRA.

When these higher earners contribute to a traditional IRA, funds are taxed on the way in. When converted to a Roth IRA they are not taxed a second time. The result is that high earners can still contribute to a Roth IRA. Under the new budget proposal, the 2010 change is reversed, eliminating the Backdoor Roth IRA.

Inherited 401k and IRAs

If a non-spouse inherits an IRA, they can choose how to receive payments. One option is to spread the distributions over their expected lifespan, with a required minimum distribution transferred to a taxable account. The new budget proposal would eliminate this option and non-spouses would have to withdraw funds within five years, in effect accelerating total tax liability.

 Mandatory Roth IRA Distributions

One benefit of a Roth IRA is the lack of a required minimum distribution. Distributions from a Roth IRA are not subjected to taxes, but future earnings on distributions are. Retirees who are forced to make IRA withdrawals can invest that money in a taxable account, where dividends, interest and capital gains become taxable income.

3.8% Tax Hike on Small Businesses

Under the Affordable Care Act, a 3.8% tax was added to wages, investment and self-employment income above certain thresholds. The tax, however, did not apply to profits of small businesses owners in pass-through entities in which they are actively involved. The new budget proposal seeks to change this exception. For now, these four suggested changes are only proposals.

Cohen & Burnett is a Washington, D.C. law firm offering estate planning, fiduciary services, retirement planning, and tax preparation. To learn more about how our trusted legal professionals can help you plan for the future, please visit our homepage.

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