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How Would Proposed 2021 Federal Tax Law Changes Impact You or Your Business?

8/31/2021

A variety of federal tax law changes have been proposed in the past few months. While it’s hard to predict how many will pass through Congress as proposed, you should be aware of how they could impact your overall tax situation.

Some of these would go into effect beginning January 2022, but others would be retroactive. We’re keeping this in mind as we work with our clients.

Here are seven potential federal tax law changes that could impact you. 

1. Increased corporate income tax rate

Businesses operating as C corporations could see their income tax rates go from 21% to the proposed 28%.

2. Subject certain income to either net investment income or self-employment tax

If you’re an S Corporation shareholder, keep an eye out for potential increases to self-employment taxes on your share of the S Corporation’s income.  Under these proposed changes, pass-through income would be either subject to the Net Investment Income or Self-Employment Tax.

Currently, for married filing joint taxpayers with an Adjusted Gross Income exceeding $250,000, a 3.8% Net Investment Tax is applied to Net Investment Income and self-employment income is not included in Net Investment Income. Under the proposed changes, all income not subject to self-employment tax would be subject to the Net Investment Income Tax for taxpayers with an Adjusted Gross Income exceeding $400,000, and ordinary income passed through to S Corporation shareholders and certain LLC members/partners would be subject to Self-Employment Tax.

3. Increased individual tax rate

Those who are in the highest tax bracket could see their top marginal individual income tax rate increase to 39.6%. This top marginal tax rate would apply as such:

Thresholds would be adjusted for inflation after 2022.

4. Increased capital gains rates

Compared to the previous changes, which tend to go up and down over the years, this change is more of an “eyebrow raiser.” If you have an adjusted gross income of more than $1 million (or $500,000 if you’re married filing separately), the tax rates for long-term capital gains and qualified dividends would now be taxed at ordinary income tax rates. Again, the adjusted gross income level would be adjusted for inflation after 2022.

415 Group meeting with client to discussed proposed federal tax law changes

Be sure to meet with a trusted advisor to discuss these proposed changes

5. Gifts and death transfers would be subjected to capital gains taxes

Property transferred by gift or held at death would now be subject to capital gains taxes (at the new capital gains tax rates proposed above) less a $1 million per person exclusion. Essentially, this plan aims to curb the tax benefit from the tax-free “step-up” in basis that typically occurs at death when property is transferred out of an estate. There would now be a taxable gain on the difference between the date of death fair market value and the original basis (less the $1 million exclusion). Determining the basis of an asset held to death could prove challenging.

6. Limited deferral for real estate transactions

One of the proposed changes is to Section 1031 and “like-kind exchange” deferral. Currently, if you sell real property (a building, land, etc.) you pay capital gains tax. But if you roll the proceeds from the sale into a new property you’re buying, the capital gain is deferred, and you won’t have to pay taxes at that time.

With the proposed change, you would no longer be able to defer an unlimited amount of gain. The cumulative cap for like-kind property exchanges would be at $500,000 (or $1 million for married individuals filing a joint return) in a taxable year. Any gains beyond that would be taxed during the year you transfer the property.

7. Increased IRS funding

After years of being under-funded, President Biden is focused on substantially increasing funding for audits and tax enforcement. This would improve issues such as operating at low capacity and communication backlogs.

This also means that the number of taxpayers they audit, along with the amount of notices they send, would likely increase.

Work with Your Trusted Advisor

Wading through these changes can be overwhelming, whether you’re diving in before or after they have passed. Working with a trusted advisor—like those of us at 415 Group—will help alleviate that stress and ensure you get the best possible outcome next tax season.

Contact us today if you have questions regarding these federal tax law changes and how they could impact your overall tax situation.

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