Wealthy clients mostly avoid new taxes as spending bill nears finish line

Legislation that began last year with several potential tax hikes for wealthy Americans will cross the finish line this week carrying just a handful of tax provisions — and none that directly target high-net-worth individuals.

Last Sunday, the Senate approved the Inflation Reduction Act, a $790 billion bill that funds Democrats’ health care and climate priorities over the next 10 years. It passed 51-50 under a parliamentary rule that allowed it to bypass a Republican filibuster and advance with the tie-breaking vote of Vice President Kamala Harris. The bill is headed for House approval Friday, likely with only Democratic support.  

The legislation has shrunken from what started last year as the $3.5 trillion Build Back Better Act and was then trimmed to the $1.75 trillion version the House approved in November.

The House iteration of Build Back Better contained a litany of tax increases on people making more than $400,000 annually, including expanding the net investment tax, levying a surcharge on people making more than $10 million annually, imposing limits on individual retirement accounts exceeding $10 million, and curbing rollovers from traditional IRAs to Roth IRAs.

But the House bill stalled in the Senate. What emerged last month after negotiations with moderate Democratic senators was the Inflation Reduction Act, whose tax provisions are much more limited and for the most part don’t target wealthy individuals.

The so-called payfors in the current bill include a corporate minimum tax, an excise tax on corporate stock buybacks, an $80 billion boost to the Internal Revenue Services budget and drug pricing reform.

“The headline of this is Democrats didn’t get a big tax bill passed,” said Jim Cahn, chief investment officer at Wealth Enhancement Group. “It’s a lot of noise and a lot of money, but it’s probably not a lot of impact. The bill has very specific winners and losers.”

Bob Lickwar, managing director for tax at UHY Advisors, a CPA firm, said there’s not much to parse from a tax perspective.

“There are not a lot of tax components to this bill,” Lickwar said. When it comes to substantial tax increases on individuals, “nobody wants to pull the trigger. My clients are happy.”

CORPORATE INCREASES

There are some tax floors built into the bill. For instance, the 15% minimum tax applies to businesses with an income that exceeds $1 billion over three consecutive years.

“Whether it’s good or bad [tax] policy depends on the taxpayer who’s reflecting on it,” said Richard Shapiro, a tax director at accounting firm EisnerAmper. “It will add a great deal of complexity to the tax filing obligations of companies that are [affected].”

Capitol Hill Republicans are criticizing the 1% tax on stock buybacks, calling it a threat to retirement savings for 401(k) and IRA participants’ corporate stock.

But several exceptions were added that shield from the tax repurchased stock that's contributed to retirement plans, repurchases of less than $1 million and repurchases made by registered investment companies and real estate investment trusts.

The changes were advocated by the Investment Company Institute, which represents the mutual fund sector. ICI spokesperson Stephen Bradford said the organization was trying to protect people who are saving for retirement and other goals.

“People will continue to save,” Lickwar said of the buyback tax. “It’s just another nibble out of their retirement plan.”

BEEFED UP IRS

Another way the Inflation Reduction Act is being paid for is through a more powerful IRS.

“If the existing rules are enforced more thoroughly, that alone should raise more money,” Shapiro said.

The target of IRS audits likely will be wealthy Americans who may be trying to dodge tax payments.

"Increased funding for the IRS in the Inflation Reduction Act will likely result in more audits and overall IRS scrutiny of high-net-worth individuals,” said Michael Kramarz, director of federal tax resolution at Kaufman Rossin.

The IRS is likely to use the increased funding to finance its Global High Wealth Program, Kramarz said, which “takes a holistic approach in addressing the high-wealth taxpayer population by reviewing the complete financial picture of these individuals and the enterprises they control.”

WEALTH TAXES REDUX?

Even though the wealthy may have the IRS looking over their shoulders, it’s a far cry from Congress directly raising their taxes. But lawmakers may not have completely abandoned the tax changes that fell by the wayside on the Build Back Better's transformation into the Inflation Reduction Act.

“These provisions have been drafted and are in the hands of [congressional] staff,” Shapiro said. “If and when the politics allows for it, they are available to be re-proposed.”

That ensures advisers and their clients will continue to monitor tax policy. “That upper middle-class feels targeted by what a lot of the Democratic Party is proposing,” Cahn said.