As Congress considers changes to investing for high earners, here are some tax tips for the rest of us

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Congress is considering some drastic changes to traditional and Roth Individual Retirement Accounts including mandatory distributions after accounts reach a certain size. The changes target the highest-earning Americans who have multimillion-dollar retirement accounts.

© Olga Shumitskaya/Getty Images Only 37% of households own one or more IRAs, according to a study released earlier this year by the Investment Company Institute.

All this assumes the proposals, which were included in an amendment to President Biden’s $3.5 trillion budget reconciliation package, get enacted. They were introduced in September by U.S. Rep. Richard Neal, D-Mass., chairman of the House Ways & Means Committee.

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One change highlighted by legal firm Ropes & Gray would require people with $10 million or more in combined 401(k)-style workplace plans plus traditional and Roth IRAs to start pulling out money. Non-Roth account holders already must make required minimum distributions starting after age 72, but this proposal could be more drastic and wouldn’t be based on age.

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“The minimum distribution generally is 50% of the amount by which the individual’s prior-year aggregate traditional IRA, Roth IRA and defined-contribution account balance exceeds the $10 million limit,” explained Ropes & Gray in a summary.

It and various other changes would apply to higher-income investors (singles with taxable income over $400,000 and married joint filers earning above $450,000). Another provision would prohibit higher-income people from making “back door” investments in Roth IRAs. As it is, singles with income above $140,000 or joint filers earning more than $208,000 can’t directly contribute to a Roth. But indirectly, anyone could make a nondeductible contribution to a traditional IRA then convert this after-tax contribution to a Roth to ensure that future earnings grow tax-free.

This provision presumably would end the practice, though it wouldn’t kick in until 2032. However, several of the other changes could start next year.

Among other changes, the Neal amendment also would prohibit high-income people with at least $10 million in IRAs and 401(k)-style plans from investing new money in those types of accounts. That would be a switch from current law, where affluent investors face prohibitions on contributing new money based on income, but not based on account balances. In addition, the proposal would require employers to report participant balances in 401(k)-style accounts above $2.5 million to the IRS.

These and other possible changes are designed to chip away at mega IRAs and discourage the wealthy from using the tax-sheltered accounts as much as they currently do. But the proposals wouldn’t affect the vast majority of Americans.

Only 37% of households own one or more IRAs, according to a study released earlier this year by the Investment Company Institute, and just 12% of households contribute new money in a given year.  Rather, rollovers from 401(k)-style plans have fueled most of the growth of IRAs, which eclipse 401(k)s, pensions and other account types as the largest component of the $37.2 trillion U.S. retirement market, according to the institute.

Another way to get answers from IRS

It’s not easy to reach the IRS by phone or mail, especially after the  COVID-19 pandemic disrupted operations. But there’s a less-obvious way to check on some aspects of your tax situation — by requesting a tax transcript.

The IRS provides several types of these documents on request at no cost. They can be used to verify that you made or received certain payments, for example, and to check other details.

National Taxpayer Advocate Erin Collins recently reminded taxpayers of the transcript option to get answers to questions that have lingered owing to long phone wait times and the inability to reach a live person.

Transcripts have many uses such as validating income and tax-filing status for mortgage applications and student loans, providing useful information for filing an amended return and checking to see that estimated tax payments were received or stimulus payments made. They also can verify when the IRS received a tax return and payment histories.

Taxpayers may request transcripts in several ways such as through the Get Transcript online portal at irs.gov, by mail or by calling the IRS at 1-800-908-9946.

Collins suggests creating an online account to obtain transcripts, though you will need to provide personal identifying information before the IRS will authenticate your account.

Some energy credits expiring

The federal government for years has offered tax credits to promote energy efficiency. But a few of those tax breaks are scheduled to expire at the end of this year or fairly soon thereafter, noted tax researcher Wolters Kluwer Tax & Accounting.

For example, individuals can take advantage of a nonbusiness energy tax credit — a tax break that’s scheduled to expire at the end of 2021. With it, homeowners can receive a $500 lifetime credit for 10% of the cost to make certain energy-efficient improvements to principal-residence building components such as some windows, doors and insultation and for 100% of the cost of qualified residential energy property, including some heating and air-conditioning systems and water heaters.

There’s also a 26% credit, available for 2021 and 2022, to install certain energy-efficient home equipment including solar water heaters or solar electric systems, small wind equipment and more. This credit is set to drop to 22% in 2023 and expire after that.

The federal government also offers tax incentives to encourage purchases of electric vehicles, but some of these breaks have expired already, depending on the manufacturer. For example, there’s a plug-in electric credit worth up to $7,500 for personal and business vehicles, but it has phased out for Tesla and General Motors cars, Wolters Kluwer said.

Reach the reporter at russ.wiles@arizonarepublic.com.

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This article originally appeared on Arizona Republic: As Congress considers changes to investing for high earners, here are some tax tips for the rest of us

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