The 2021 Tax Increase- Tax Planning Starts Now!

Benjamin Franklin famously said, "If you fail to plan, you are planning to fail!" While Congress debates on President Biden's tax plan, the "Build Back Better Plan," which is just weeks away from its final approval, there are likely scenarios that you and your CPA should be planning for in the months to come.

Increase in Capital Gains Tax Rate:

The proposed tax plan will increase the capital gains rate to 25% from the current 20% rate. In the current tax proposal plans, the increase would be effective for sales as of September 13, 2021, unless there is a binding contract as of September 13, 2021, and the sale is completed by December 31, 2021.  

Increase In the Top Tax Rate

The top tax rate for individual income is currently 37%. The proposed tax plan would increase the top tax rate to 39.6% in 2022.

• $509,300 Married individuals filing a joint return 
• $452,700 for unmarried individuals
• $481,000 for head of household
• $254,650 for married individuals filing a separate return
• Estates wand trusts with $12,500 taxable income

After 2022 the thresholds would be indexed for inflation.

Increase Corporate Income Tax rate

President Biden also proposed a 28% corporate tax income rate. The proposal submitted by the Democrats states the proposed corporate income tax with an increase to 26.5%. The current rate is 21%.

There is also a likely chance of a proposal towards a graduated increase in the corporate income tax rate, accompanied by a discussion regarding limiting the maximum allowable individual deduction for qualified business income. This will, in turn, allow S-corps to reorganize partnerships, so long as the S-corp was formed before May 12, 1996, and reorganizes by December 31, 2023.

While the negotiations in Washington are still ongoing, other tax issues being considered are:

• Reducing the Gift and Estate Tax exemption to $5 Million beginning January 1, 2022
• A 3% tax charge on individuals, trust & estates on a modified gross income of over $5,000,000, and estates and trusts with an income over $100,000
• Introducing individual contribution limits to IRAs if the total value exceeds $10 million
• Modifying the $10,000 cap on State and Local (SALT) deductions
• Increasing the carried interest holding period from 3 years to 5 years to be taxed at capital gains rates—effective December 31, 2021

While the President's proposed plan details are still under consideration and review, you should consult with your CPA to discuss your tax situation and the proactive actions you should implement to save on your taxes in 2022. You may not have the opportunity to take advantage of available tax savings if you wait until the bill details are finalized.

Contact our team to set up an appointment today!