- Year-End Tax Planning: Collected - October 2, 2021
- Year-End Tax Planning: Part 1 - October 2, 2021
- Year-End Tax Planning: Part 3 - October 2, 2021
Here is a list of some of the proposed changes with tips on planning for them. However, these are simply proposals. There will be numerous changes coming about as a result of negotiations.
- Top individual tax rate will rise: If you earn under $400,000 of adjusted gross income, ,the income tax rate changes won’t affect you. For those who make over $400,000 for single taxpayers or over $450,000 ( but under 5 million dollars) married filing jointly, you will see the top rate go up from the current37% to 39.6%, which was the rate before the tax rates were changed at the end of 2017. If you are making a bundle (over 5 million dollars of adjusted gross income), they propose a 3% surcharge on Incomes of $5 million or more.
2. No change in SALT limits: Under the tax Reform law passed in 2017, state and local taxes were limited to a $10,000 deduction. There is nothing mentioned in the proposals to raise this;however, there are numerous representatives especially from high tax states who are threatening to veto this bill unless these SALT limits are increased. Stay tuned for further information.
3. Five percent increase in capital gains rate: Currently if you sell stocks, real estate, bonds or mutual funds, your pay a maximum capital gains rate of 20%. The proposed changes increase this maximum rate to 25% for single individuals earning under $400,000 or married filing joint taxpayers of $450,000. There is also a current surcharge of 3.8% for those who earn over $450,000, so the top capital gains rate for those earning over $450,000 could be as high as as 33.8% of you earn under five-million dollars or 36.8% of your adjusted gross earnings is over five million dollars,which includes the capital gains.
Tip: Although the proposal would make these changes take effect as of September 13, 2021, they usually don’t take effect until the passage of the law. Thus, if you have any substantially appreciated assets that could put you in the top capital gains bracket, you may want to see these asap.
4. The 20% pass through deduction would be limited: Pass through businesses get a special deduction of 20% of their modified adjusted gross income. In effect, as a self employed taxpayers, S corp, LLC or partnership , you can effectively avoid up to 20% of your net profits from tax. The new proposal doesn’t eliminate this ,but it does play a limit of this deduction of $400,000 for single taxpayers and of $500,000 for married couples.
5. The 3.8% surtax would apply to undistributed passive income: If you are an S corp, you would receive salary and dividends. The dividends that aren’t salary has been exempt from the 3.8% surcharge on net investment income and from Social Security. The new proposal would add the 3.8% surcharge on dividends and other passive income from S corps.
6. Corporate Tax rates would rise to 26.5%: The top corporate tax rate for public companies and C corps are currently a flat 21%. The proposal would raise this to 26.5%,which is less than what President Biden wanted, which was 28%. There are also proposals to make this a graduated rate instead of a flat rate. We will see what happens.
7. Higher taxes on foreign income: The minimum tax on foreign income would go up from the current 10.5% to 16.6%. To help offset this increase, however, companies would be able to use more of their foreign tax credits.
8. High Income people with large retirement accounts would no longer be eligible to contribute to their retirement plans: High – income people with tax preferred retirement accounts ( such as IRAs, 401Ks, SEPs etc.) in excess of 10 million dollars would no longer be able to contribute to those accounts and would face higher mandatory distributions.
Tip: Using a Roth IRA and Roth 401K would be even more beneficial with these changes since there are no mandatory distributions from these and the monies are all tax free.
9. Higher proposed taxes on cigarettes: There are some proposed excise tax increases on cigarettes. If you are a smoker, you might want to accumulate cigarettes in quantity before these new taxes go up.
10. The 12 million dollar per person exemption from estate taxes would end in 2021 instead of 2025. This would reduce the estate tax exemption after 2021 to about 5.49 million per person, adjusted for inflation.
Tip: If you have a very substantial estate, you might want to consider buying life insurance,which should become more in demand. In addition, you might want to consider making family gifts and using other estate planning techniques. We will be writing about this in the future if this proposal becomes law. I have numerous tips on this that can be found in my book “ Achieve Financial Freedom: Big Time”
In summary, there are a lot of proposed changed as you can see This list is also not comprehensive. We do, however, expect much of this to change as negotiations occur. We will be informing you about any law change as soon as it passes or even changes in these proposals that we think might come about, so stay tuned.
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