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What You Can Expect as a Taxpayer
In our last few blog posts, we have been discussing the likelihood of taxes going up in the near future. We already know that the current individual tax rates will expire at the end of 2025.
Given some of the upcoming priorities, like the comprehensive infrastructure bill being considered, there are a number of tax changes that are being discussed.
Most of them won’t take effect until January 1, 2022, but a recent article on the WealthManagement.com website indicated a few of these might take effect this summer or fall.
This is why I wanted to provide you with some specific changes being evaluated, and current opportunities that you might want to take advantage of.
What Tax Changes Are Likely to Happen
- Raise the top tax rate from 37% to 39.6% for those earning over $400,000
- Eliminate preferential tax treatment for qualified dividends and long-term capital gains for people who earn more than $1m per year. This means that, after adding the 3.8% net investment income surtax, the top rate on capital gains would go up to 43.4%! That is nearly a double.
- Expand the social security tax to earnings over $400,000 (12.4%, self-employment or half paid by employer, half by employee).
- Eliminate some favorable real estate tax benefits. Particularly IRC section 1031 tax deferred exchanges for taxpayers with higher incomes. If you were thinking of selling a property to reposition income property holdings, you should be making a plan right now.
- Repeal of the 2017 Tax Cuts and Jobs Act (TCJA), which would eliminate the 20% pass through of business income exempt from tax.
- It would also raise the tax on corporate income from the current 21% to 28% (could be as high as 35% if the TCJA is repealed).
These are some of the most “popular” ideas being discussed. There are many others. Some of those would be a “wealth tax” on people with net worth’s over $50m, elimination of the step up in basis at death on assets (like real estate and stocks), reduction in the amount of an estate that is exempt from estate taxes and a stock trade tax that is aimed at day traders, are just a few being mentioned.
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Tax Changes to Know About Right Now
We have seen a huge increase in the national debt due to various stimulus bills since Covid hit, that has happened with borrowed money that eventually needs to be paid back.
This is in addition to the over $1 trillion in annual deficits that have piled up during the last administration.
Finally, there will be a huge infrastructure bill of $2-4 trillion proposed in the next several weeks. That bill comes with a commitment of that spending not to be funded with borrowed money. Because of this, the likelihood of an increase in taxes grows by the day.
What Should You Be Thinking About Right Now?
If someone asked you if you would prefer to pay tax of 20% or 43.4% on your profit, which would you choose?
I have heard from many clients that they have highly appreciated positions in stocks like Apple and Microsoft. They have been hesitating to sell as they don’t want to pay the taxes.
Others have real estate they have owned for decades that has appreciated greatly and they are thinking about not being a landlord anymore.
Still others have large balances in a retirement plan that withdrawals will be taxed as ordinary income when the money is drawn, so they only take out the minimum, because they don’t need the money now.
Investigate Your Tax Options
If you are one of the folks mentioned above or own any highly appreciated asset that you have been considering converting to cash, I would encourage you to investigate your options and make a well-informed decision.
Here are a couple of situations that should be addressed right away.
- If you have highly appreciated stock positions. You could sell the stock, pay taxes and buy the position back after a month or so (there are wash sale rules) so that there will be less taxes in the future. There are some technical rules that you want to make sure you don’t violate.
- If you have real estate that isn’t paying enough income, or you want to give up the headaches of being a landlord. Consider selling now and doing a 1031 exchange before limitations are placed on the strategy.
- If you have a lot of money in IRA’s; consider withdrawing money and paying tax now, giving money to charities you support directly from the IRA which will offset taxes and reduce future Required Minimum distributions (RMD’s). Do a Roth conversion.
These are a few of the more common issues you might have to deal with to mange taxes now and into the future. We have a number of tools available to help you evaluate different strategies and whether they make sense for your situation.
One that you might want to utilize is a Roth Conversion Calculator. This tool helps to quantify costs and benefits over time so that you can decide if a conversion is right for you right now.
Know Your Options
Taking advantage of rules now, can make a huge difference to your future security. Taxes are a part of life; overpaying taxes is not. Reach out to us so we can help you understand your options.
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