You have probably seen plenty in the news about what may happen to taxes in 2021 given a new administration and the impact of the pandemic relief efforts on the national debt. To be clear, nothing is final and there is much debate and negotiation that will take place before we have final changes to the 2021 tax code (including debate on if the changes will be retroactive for a portion of 2021 or start in 2022).

However, I think it appropriate to share some recent details that became public on this topic as part of the proposed government budget. Please understand that I am not making any political statement on whether I think these proposed changes are good or bad. I am simply trying to share directional indicators as some may have impacts on certain aspects of your taxes (business and/or personal) as you plan for 2021 and beyond.

Below are the key areas pertinent to many of our clients with a brief summary of the proposed changes. If you desire more information, click on the image over that area and you will be taken to the the details right from the Administration's Fiscal Year Revenue proposals.

PERSONAL TAXES

Raise the Top Tax Rate for Higher Income Earners

The highest marginal income tax rate is currently 7%. This proposal would raise that rate to 39.6% on high income earners. High income earners would be defined as those with taxable income over $509,300 for married filing joint returns, $481,000 for head of household and $452,700 for unmarried individuals

Increased Capital Gains Tax

Currently, long term capital gains are taxed at a progressive rate with 20% being the highest rate. This proposal has two aspects. First, for taxpayers with adjusted gross income over $1 million, long term capital gains above the $1 million level would be taxed as ordinary income. Second, this proposal seeks to treat the transfer of appreciated property by gift or on death as a capital gain event. In the past, these transfers normally avoided any tax consequences and resulted in "stepped up" values to the recipients.

Revised tax treatment of S Corps

Compared to sole proprietors (Sched C) and general partnerships (1065), the S Corp structure (1120S) has provided a tax benefit relative to payroll taxes (about 15% in total between FICA and Medicare). The benefit derives from the fact S corps only pay these payroll taxes on the owner compensation that is deemed fair and reasonable, not distributions, while sole proprietors and general partners pay the payroll tax on their full net income (subject to certain limitations).

This proposal would limit that benefit by making sure S-corps pay the payroll taxes on distributions in certain situations and above certain limits

Various Individual Credits

There are tax credits available today in the following areas for eligible taxpayers.

• Child tax credit
• Child and dependent care tax credit
• Advance premium tax credit
• Earned income tax credit

This proposal generally expands some of these credits or makes them permanent.

Limits on Like Kind Exchanges (1031)

Today, a 1031 exchange allows eligible taxpayers who meet certain requirements to potentially defer the entire gain on investment properties that are sold and exchanged for another "like-kind" property.

This proposal would set limits on those deferrals to $500,000 for individuals and $1 million in the case of a married couple filing joint return. However, it is not clear if these limits are annual or lifetime.

Hybrid Vehicle Credits

Currently the available credit for purchasing hybrid vehicles is limited to certain types of vehicles and notably excludes medium and heavy duty vehicles. There is also a credit for refueling and charging station is installed at a taxpayer's residence that is set to expire.

This proposal expands the credits to include medium and heavy duty use vehicles and also extends the credit for charging stations at taxpayer's residence for another 5 years.

BUSINESS TAXES

Finally, for those that suffer from serious insomnia, feel free to click the link below and read the full 103 page document that covers many more changes than those noted above. It should also be noted that there is also mention of additional funding for audit resources to close certain loopholes or improve compliance.

I thank the Journal of Accountancy for providing much of the material that is referenced in this update. As always, we thank you for your continued business and hope you find these updates timely and informative.