Big tax changes are brewing. What would you like to know.
If you make a lot of money or smoke, chances are you don’t like the tax package that Congress needs to vote on before the end of the month.
Democrats, led by President Joe Biden, are clear on where they stand: higher taxes for higher earners: 3% surtax on income over $ 5 million, changes to individual retirement account rules , a reduction in the exemption for shares of qualified small businesses, and the elimination of an estate planning tool would be the biggest change.
And that’s not all: there is still no talk of increasing the ceiling for deductions for property taxes and local and local taxes. In addition, some of the measures – an increase in the capital gains tax – could come into effect retroactively. Most, however, would apply to 2022 income.
The changes essentially align with Biden’s campaign pledge to raise taxes only on the rich, although House Democrats want to increase the federal tax on cigarettes, which now stands at $ 1.01 on package, and on other nicotine products. A 2019 government study found that 21% of adults with an annual household income of less than $ 35,000 smoked cigarettes, compared to 7% of those with more than $ 100,000.
In total, $ 2.9 trillion in tax hikes are proposed to offset Biden’s $ 3.5 trillion budget bill, which includes new and broader spending on child care, health care, education and clean energy.
Remember, however, that nothing is set in stone yet. Revisions could still happen. Here is where it stands now:
Double income hit
If you produce alone and earn more than $ 400,000, or if you produce as a couple and earn more than $ 450,000, your income tax rate drops from 37% to 39.6%.
The second hit would be a 3% surtax on modified adjusted gross income of more than $ 5 million. The modified AGI is your adjusted gross income less deductions for investment interest income.
Pain of capital gains
The maximum capital gains tax rate is reduced from 20% to 25%. Add to that the 3.8% tax on investment income that came into effect under President Barack Obama, and investors are considering a 28.8% tax on gains.
If passed, the increase would apply to all transactions concluded after September 13, 2021, said Tara Thompson Popernik, research director for the wealth strategies group at Bernstein Private Wealth Management. Barron.
“This change is not dramatic, but it will take effect immediately, retroactively,” she said. “The reason they wrote it this way is to avoid a massive year-end sell-off.”
Suppression of IRA
Prepare for stricter rules for IRAs, including:
• Those with total IRA assets of $ 10 million or more would not be able to make more contributions.
• So-called Roth backdoor conversions – used by the wealthy – would be banned. High net worth taxpayers generally cannot contribute to a Roth IRA, which is not taxed, due to the income thresholds of $ 140,000 for singles and $ 208,000 for couples, but they can fund a regular IRA and immediately convert it to Roth.
• Accredited investors — those with $ 1 million or more in investment assets — should get rid of their so-called qualified investments, private debt, and private equity. They would have two years to make the transition.
“They will have to do something with these investments or face the possibility that their IRA will be disqualified as an IRA,” Popernik said, adding that it would be a problem for accredited investors with new investments because the blocking periods are generally longer than two years.
“We really need more clarification on this,” she told B.of arron.
Inheritance tax tightens
Expect the fiscal grip to tighten on property taxes.
It is proposed to reduce the estate tax exemption per person to about $ 6 million from $ 11.7 million. For married couples, the exemption increases from $ 23.4 million to just over $ 12 million.
Also on the chopping block are transferor trusts, which the ultra-rich use to transfer their assets to their heirs. These tax shelters would become part of the estate again and would be subject to tax.
LLC and others, get ready
Another double whammy: this would hit the intermediary entities: LLCs, S companies and partnerships.
Owners of these companies would have to pay Obama’s 3.8% investment income tax on active income – their salaries. Now, the levy only applies to passive income, which is defined as any income (rent is an example) that is earned without involvement in the business.
Second change: new limits on the value of the deduction passed on.
Currently, homeowners can deduct 20% of all of their qualifying income.
“You could have $ 100 million in income today and get the full 20% deduction. If your business qualifies under current law and you earn $ 20 million in income, you could get a deduction of $ 4 million, ”explained Sarah Allen-Anthony, Managing Partner of Global Customer Services private at Crowe LLP.
If the rules change, however, the maximum value of that deduction would be capped at $ 500,000 for intermediate owners who are couples filing jointly, and $ 400,000 for singles – and no more, Allen-Anthony said.
See you soon for a small business break
Investors who own QSBS, which are shares issued by C companies with less than $ 50 million in assets, do not have to pay capital gains tax if they meet certain conditions, such as holding shares for at least five years.
If Democrats had what they wanted, QSBS owners wouldn’t be 100% tax exempt. They should pay taxes on 50% of their shares. The modification of the exclusion would be retroactive to September 14.
“I work with a lot of investors and start-up founders in Silicon Valley and New York, and they’ve been swept away. On September 13, people were frantically trying to sell tens of millions of dollars in QSBS, ”said Christopher Karachale, partner at HansonBridgett, a San Francisco law firm. that of Barron.
“A customer was supposed to sell next week, but he said, ‘We’re selling $ 18 million at 1 p.m. today,’ he said.
The last big thing still on the table is the $ 10,000 deduction limit on state and local taxes, or SALT. The cap hits high tax states like California, New York and New Jersey the hardest. This summer alone, California Governor Gavin Newsom signed a SALT cap workaround.
Several House Democrats, including Reps Josh Guttheimer of New Jersey and Thomas Suozzi of New York, refuse to vote for the tax package without repealing the SALT cap. Others, mostly Republicans, argue that the cap ensures that the rich pay their fair share.
Figures from the Non-Partisan Tax Policy Center show that 96% of the benefits of a repeal would go to the richest 20% of wage earners. Plus, removing the cap would mean at least $ 88 billion in revenue loss next year.
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