UPDATED Proposed Biden Tax Changes

There has been a lot of talk about proposed tax changes. Nothing is certain yet, of course, And some of these have more of a chance to become law. In no particular order, here are some of the items we’re following:

• Increase the C Corp flat tax rate from 21% to 28%. If this passes, we may see some small business owners switch back to S Corporations. However, at the highest tax brackets, the C Corporation would still be the better choice. And C Corporations provide a lot better benefits for the shareholder/worker. The best strategy here would be to use a dual corporation strategy, with an S Corporation working as the primary operating arm.
• Increase top marginal tax rate from 37% to 39.6% for singles earning more than $452,700 and married filing joint earning more than $509,300. I think some version of this is likely. It is disheartening, though, to see the marriage penalty continuing. Two singles, living together, would be able to avoid the top tax rate with a combined income of over $900,000. But if they were married, they hit the top tax rate at $509,300.
• Increase long-term capital gains and qualified dividend tax to 39.6% for those with $1 million or more in taxable income. This would only apply to capital gains and dividends once the taxable income threshold is reached. In a dangerous precedent, this increased tax would become effective retroactively to April 28, 2021. My personal opinion is that we won’t see this pass as is. There could be an increase, but I don’t think it will be that much and I don’t think it will be retroactive.
• Introduce a wealth transfer tax. If unrealized gain (fair market value less basis) exceeds $1 million, there would be a capital gains tax. The transfer tax would apply to transfer during your lifetime (such as with gifts) or upon death. It applies to all appreciated property including land, businesses, stock, crypto and trusts.
• Payment of the transfer tax related to certain businesses, such as farms, can be made over a 15-year period. And, if property continues to be family-owned and operated, no tax would be due until the business was sold or ceased to be family-owned/operated. However, family is not defined, and there’s no mention if interest would accrue until the recognition event. The wealth transfer tax would be effective starting in 2022.
• Section 1031 exchanges would be limited to deferring $500,000 of gain per person per year (cumulative throughout the year). It is unclear if this would apply to property sold in 2021 but replacement not acquired until 2022.
• Certain limited partners and S Corp shareholders who are materially participating would be subject to self-employment tax on their distributions.

We don’t know yet what will end up passing and the details of the programs that do pass. The one thing we know is that there will be change. Make sure you keep up on the blogs at?USTaxAid.com