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Recently, President Biden proposed several tax law changes to his American Jobs Plan and American Families Plan. Below are some of the tax savings that could be significantly changed or eliminated under Biden’s plans.
Long-term capital gains and qualified dividends
Under current tax law, the profit on the sale of an estimated asset that has been held for more than a year is taxed at a graduated tax rate. In general, the highest tax rate is 20%, unless net withholding tax is applicable. This rate also applies to qualifying dividends.
Under the proposed tax law, long-term capital gains and qualified dividends would be taxed as normal income if a taxpayer’s adjusted gross income exceeds $ 1 million ($ 500,000 for separate marriages). The effect would usually be the highest tax rate of 37%, provided the net withholding tax does not apply.
1031 similar exchanges
Under current tax law, taxpayers who sell valued properties that are used in a trade or business can postpone paying capital gains tax on the sale if that property is swapped for a similar or similar property. If certain conditions are met, the tax is deferred to a later date.
Under the proposed tax law, taxpayers would still be allowed to defer profit from a similar exchange up to a total of $ 500,000 per taxpayer per year ($ 1 million for filing joint declarations for married persons). Profits in excess of $ 500,000 ($ 1 million for filing joint declarations for married persons) would be recognized in the year the property is subject to the exchange transfer.
A partnership is not subject to federal income tax, but transfers the income and losses of the partnership to the shareholders. In addition, the income and loss positions retain their character as they flow through to the partners. The partners, in turn, must include the partnership items in their individual tax returns. One of the interests that a partner can receive in exchange for services is a share in future profits of the partnership, also known as “profit sharing” or “carried interest”.
According to current tax law, income from profit-sharing is generally subject to self-employment tax, unless the partnership generates income that is exempt from self-employment tax.
Under the proposed tax law, a partner’s share of the income from Investment Services Partnership Interest (ISPI) in an investment company is generally taxed as ordinary income regardless of the type of income at the partnership level if the taxpayer’s taxable income is from all sources Exceeds $ 400,000. In addition, the partner would have to pay self-employment taxes on this income.
Increased base through gift or death
If a taxpayer gives a donee valued assets during his lifetime, according to current tax law, neither the donor nor the donee recognizes the profit from the donation. The giver’s base is transferred to the recipient and the recipient records the profit if the recipient later sells the asset. If a donor dies with assets valued, the donor’s heirs will inherit the asset on an adjusted or augmented basis. The inherited top-up base is the market value of the estimated assets on the date of death of the donor.
Under the proposed tax law, a donor would realize the profit on the estimated asset in the year of the donation. The realized amount is the market value of the asset on the day of the gift above the giver’s base. For a deceased owner who has estimated assets at the time of death, the realized gain is equal to the fair value on the date of death of the owner above the base of the owner.
Social security tax ceiling
Under current tax law, income and wages from self-employment are subject to social security tax of 12.4% and income tax of 2.9% of Medicare tax, either through the Self Employment Contribution Act (SECA) or the Federal Insurance Contribution Act (FICA) . The social security tax of 12.4% is levied up to a certain upper limit. In 2021, the upper limit is $ 142,800. An additional 0.9% Medicare tax is levied on high income taxpayers whose income is above a certain level. General partners and sole traders pay SECA from their net trading or business income. Limited partners are excluded by law from paying their distributing shares in the partnership’s income to the SECA, but they pay the SECA for their guaranteed payments that apply to services performed for or on behalf of the partnership. S Corporation shareholders are not subject to SECA tax. However, S Corporation shareholders must pay fair wages for services rendered that are subject to FICA.
Under the proposed tax law, all business or business income from high-income taxpayers would be subject to Medicare tax at 3.8%. More specifically, for taxpayers with adjusted gross income in excess of $ 400,000, the definition of net investment tax would be changed to include gross income and profits from businesses or businesses that are otherwise not subject to employment tax. In addition, any net capital gains tax revenue collected under both the current law and the proposed expansion would go to the Hospital Insurance Trust Fund. In addition, limited partners and LLC members who have a significant interest in their respective businesses and provide services would be subject to SECA tax on their distributing portion of income, subject to certain thresholds. In addition, S Corporation owners materially involved in the trade or business would be subject to SECA taxes on their distributing portion of corporate income, subject to certain thresholds.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.