The transition to a new administration has led to uncertainties in tax law.
“Changes are expected with uncertainty about what to expect and when,” said Matt McKinnon, tax director at Brady Ware. “Everyone is concerned about how these changes will affect the general public, families with children, the middle class and businesses.”
Smart Business spoke to McKinnon about tax changes expected by the Biden Administration and how they will affect businesses and individuals.
How quickly could changes be made?
The Tax Cut and Jobs Act in 2017 lasted 11 months after the act was introduced, which is quite remarkable considering that it was the largest tax reform since 1986. With a Democratic President and Democrats effectively controlling Congress, something is likely to be passed in 2021. comes into force in early 2022.
What changes are proposed for companies?
According to the Employment Act, the corporate income tax rate fell from 35 percent to 21 percent. With the proposed changes, companies would pay a flat rate of 28 percent. However, there is a minimum tax rate of 15 percent on book income for those who pay no or a negative federal tax if it is more than $ 100 million.
For pass-through companies like S Corps and LLCs that are taxed as partnerships, the company itself does not pay taxes. Instead, this income goes on to the partners, who bear an individual tax burden. In general, these individuals can now deduct 20 percent of qualified business income, so they pay 37 percent tax on 80 percent of their business income. With a proposed increase in the individual tax rate to 39.6 percent and a phasing out of qualifying business income deductions for those earning more than $ 400,000, these individuals are facing a substantial tax hike.
What changes are expected for individual taxpayers?
The individual maximum tax rate is likely to return to 39.6 percent from 37 percent for those earning more than $ 400,000. We also anticipate a substantial increase in the tax rate on investment income from a preferential rate of 20 percent to a maximum of 39.6 percent for individuals with incomes greater than $ 1 million.
On the positive side, the child tax credit will increase by one year from $ 2,000 to $ 3,000 per child aged 6-17, and $ 3,600 for children under 6. Currently, if your credit exceeds your tax burden, that additional money is lost; Under the Biden proposal, this tax credit would be fully refundable.
What other changes can individuals expect?
A proposed change to individual deductions would remove the $ 10,000 cap on state, local, and property taxes to allow full deductibility, capped at 28 percent of value once an individual’s income exceeds $ 400,000. In addition:
- Currently, the Social Security component of FICA will be eliminated once income reaches $ 142,800. According to the proposal, there is a return once the income exceeds $ 400,000.
- The proposal eliminates tax-free student loan debt of up to $ 50,000.
- Inheritance tax exemption for 2021 is $ 11.7 million. Additional discounts are taxed at 40 percent. The assets are strengthened and transferred to the heirs at fair value. As part of the proposed change, the exemption will decrease to $ 3.5 million. Amounts over would be taxed at 45 percent and the increased base rule would be removed.
How can taxpayers deal with the complexity of tax laws?
The uncertainty and change make financial planning difficult as the landscape of this morning can change. A tax advisor can help you identify problems and make the best decisions. Additionally, business owners should form a cohesive team of advisors – a lender, attorney, CPA, and financial advisor – who work together to avoid tax problems so you can be proactive rather than reactive.
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