President Biden’s coronavirus pandemic relief package known as the American Rescue Plan – known as the American Rescue Plan – was recently passed by both the House of Representatives and the Senate. However, I am assuming that no major tax laws will be changed until the October budget vote can be reapplied so that the administration can quickly advance the high priority COVID-focused tax legislation without facing the filibuster.
Here are the main tax changes proposed by the Biden government:
For those making more than $ 1 million, Biden plans to increase the tax rate on long-term capital gains to 39.6 percent. This would no longer make it desirable to hold investments for more than a year, as the richest would pay 39.6 percent for short-term gains as well.
1. Property tax. Congress is promoting a wealth tax that would hit about 180,000 households. Senator Bernie Sanders says the new levy would increase federal revenue by about 10 percent and raise $ 4.35 trillion over a decade. Individuals with a net worth of $ 16 million and above ($ 32 million and above for married couples) would pay an annual tax starting at 1 percent and above $ 10 billion for married couples is 8 percent. Senator Elizabeth Warren has a similar, slightly less ambitious, wealth tax plan.
2. A higher marginal tax rate for the rich. Since President Biden wants the country’s rich to pay higher taxes, he is aiming to raise the highest marginal tax rate from 37 percent to 39.6 percent and reset it to the margin tax rate for the rich under the 2018 Tax Cut and Employment Act.
3. More social security taxes for higher earners. For those earning more than $ 142,800, the deductible is not currently subject to a 12.4 percent social security tax. But Biden wants to tax wages over $ 400,000. Under the new law, taxpayers earning more than $ 400,000 would not pay Social Security taxes on income between $ 142,800 and $ 400,000, but on income over $ 400,000.
4. A higher corporate tax rate. Although the Tax Cuts and Employment Act cut the highest corporate tax rate from 35 percent to 21 percent, the Biden government plans to raise that highest tax rate to 28 percent. While this change would not directly affect individual taxpayers, it would likely spill over to consumers indirectly through more expensive goods and services.
5. No more tax breaks for long-term capital gains for the rich. If a taxpayer holds shares at profit for at least a year and one day prior to sale, they will be taxed at a lower tax rate than shares held for a year or less. For America’s top earners, their long-term capital gains tax rates have a maximum threshold of 20 percent; Most taxpayers pay 0 to 15 percent for long-term gains.
6. Eliminate the 1031 exchanges. The Biden administration is keen to end the 1031 exchange program for real estate investors with incomes over $ 400,000. The program enables investors to defer capital gains taxes due on the sale of an investment property by reinvesting the proceeds in another property. However, if this program is phased out, high-income investors may hold onto real estate longer than in the past, which can reduce supply and demand.
7. Tax unrealized gains. The Biden government proposes a so-called mark-to-market system for taxing unrealized capital gains. Currently, individuals only pay taxes on “realized” capital gains – when the asset is sold and they make a profit. However, under the new law, they are expected to pay taxes on increases in the paper value of assets, even if the capital gain has not been realized, if they exceed a certain level of income, or if a qualifying asset exceeds a threshold.
President Joe Biden signs the American rescue plan in the Oval Office.
Doug Mills / Bloomberg
The possible long-term effects
As I look at these proposed changes to our tax law, my only concern is what the long-term implications are. Will it help lower our growing deficit? And could a post-pandemic corporate tax hike backfire and affect investment?
Could this cause companies to move out of the US to flee before taxes? We are already seeing large hedge funds leaving New York for high taxes, and Hewlett-Packard and Tesla fled the high taxes of California to the more business-friendly environment of Texas.
And if you look at accountants and tax professionals, I would say they’ve been through just enough and learned a whole new tax code in a very difficult year of pandemic. With so many significant tax changes going on, it has taken you some time to adjust to those changes – now are there any more changes to come?
As an aside, if you have significant tax changes, every industry in the US in DC will be pushing for cheap tax changes to the bill. Congress is being bombarded by every imaginable industry. Everyone will back up their case.
what does that mean to you?
What does this mean for the tax and accounting community at this point? Here’s the good news: you don’t have to learn a whole new tax code for 2020/2021. Major changes to tax law will have to wait until October, and I suspect the administration will try to get them passed by the end of the year as they come into effect in 2022.
If you or your clients feel that the proposed tax law changes outlined above would not benefit you, now is the time to speak up. We have until October to let our voices be heard.