Under a new proposal put forward by an influential Democratic member of Congress, retirement assets could be factored into a new tax regime targeting higher-income taxpayers.
Labeling it as a proposal to help pay for a Social Security overhaul, Sen. Ron Wyden (D-OR), the ranking member on the Senate Finance Committee, on Sept. 12 unveiled a 33-page proposal that he says would “fix the broken U.S. tax code and require millionaires and billionaires to pay their fair share by equalizing the tax treatment of wages and wealth.”
According to the report, revenue generated from the proposal – an estimated $1.5 to $2 trillion over 10 years – would be used to protect benefits currently promised under the Social Security system. Wyden notes that without additional funding and based on current estimates Social Security would be able to pay only 80% of currently promised benefits after 2035.
Harmonization, Anti-deferral and Lookback
As part of the funding for the Social Security funding remedy, the proposal seeks to tax ordinary income and capital gains at the same rates (capital gains are currently taxed at a lower rate). The proposal also introduces a new marked-to-market anti-deferral accounting system to require so-called high-income taxpayers to recognize unrealized gains and losses from tradable assets annually (rather than waiting until the gains/losses are realized), as well as a lookback rule to tax gains from the sale of nontradable assets (such as business interests and real estate) upon realization.
In general, those so-called “anti-deferral” rules would apply to taxpayers who have met either the income threshold of $1 million or an asset threshold of $10 million of applicable assets for each of the preceding three tax years – and that’s where retirement assets come into play. Tax-preferred savings accounts with a combined value in excess of $3 million (indexed for inflation) would be included for purposes of determining the asset threshold and whether the taxpayer is an applicable taxpayer and, therefore, subject to the new taxation rules.
However, the proposal doesn’t impose a tax on trading in those retirement accounts. Assets held in tax-preferred savings accounts would be taxed in the same manner as under current law, even if a taxpayer is an applicable taxpayer.
Tax-preferred savings accounts would include tax-qualified retirement plans (like a pension or 401(k) plan), 403(b) plans, 457 plans, SIMPLE IRAs, SEPs, IRAs (traditional or Roth), HSAs, Archer MSAs, 529 plans or Coverdell accounts.
According to an example, if an individual taxpayer has $4 million in tax-preferred savings accounts, only $1 million (the amount over the $3 million threshold) is counted toward the asset threshold for the purpose of determining whether a taxpayer is an applicable taxpayer, but no amount of the savings in such accounts is ever subject to anti-deferral accounting.
The proposal also explains that balances in flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and the right to a benefit from a defined benefit (DB) plan would not be considered applicable assets. Additionally, the current tax rules that permit a business owner to defer recognition of gain from the sale of stock in the business to an ESOP would not change under the proposal.
What Is Counted?
For purposes of determining whether a taxpayer meets the asset threshold, applicable assets would include all capital property, such as stocks; partnership interests; bonds or other evidence of indebtedness; futures, options, and other derivatives; intangibles; real property; acquired patents and copyrights; collectibles; and other personal property. Cash would also be considered an applicable asset. Household goods would not generally be considered applicable assets, subject to limits to prevent abuse.
Special rules would also apply for personal residences and family farms. Personal residences up to $2 million and family farms up to $5 million would not be counted when determining whether a taxpayer meets the asset threshold. Values above these thresholds will be counted toward the asset threshold. For example, if a taxpayer’s home is valued at $3 million, the first $2 million is exempt and $1 million is counted toward the asset threshold.
Non-Tradeable Assets
Taxes on gains realized from non-tradeable property such as real estate, business interests or collectibles will be calculated at sale or transfer through a lookback charge, according to a summary. The lookback charge would tax accrued gain and minimize the benefit of deferring tax.
Sen. Wyden notes that he is evaluating several possible methods of calculating a lookback charge, including an interest charge on deferred tax, a yield-based tax to eliminate the benefits of deferral or a surtax based on an asset’s holding period.
In general, Sen. Wyden’s proposal – though the first to target a Social Security fix – appears to be the latest in a string of ongoing proposals ostensibly targeted at higher-income individuals, including recent proposals to tax financial transactions. In fact, various presidential candidates and Democratic lawmakers have floated several proposals for a financial transaction tax, first offering them to limit purported speculative trading and later repurposing them to help pay for pet projects. One of the latest iterations comes from Democratic presidential candidate Sen. Kamala Harris (D-CA), who has proposed an FTT to pay for a “Medicare-for-all” proposal. Similarly, Democratic presidential candidate Sen. Bernie Sanders (I-VT), along with several cosponsors, has proposed an FTT with different rates to help pay for a cancelation of all student loan debt.
- Log in to post comments