With a potential tax increase coming for higher earners, it’s essential to know what you can do to make sure that you and your business are in the best position to navigate it successfully. There are a number of different components involved in a potential tax increase, but whether it affects you positively or negatively depends on what you do now to prepare for it.
Due to the pandemic, and the government’s relief efforts, the nation’s debt is growing. In an attempt to help reshape the nation’s economy with the American Families Plan and the American Jobs Act, the Biden Administration has plans to increase income taxes for people with incomes over $400.000.
This whitepaper will explore what the tax increases are likely to represent and whom they will affect. It will also discuss strategies to help you and your business position yourself for any potential increase.
There are several tax increases in the two prominent plans, the American Families Plan (AFP) and the American Jobs Act. The AFP has been created to fund child care and education while making it harder for high-earning people to evade taxes. The plan will cost roughly $1.5 trillion and includes universal pre-kindergarten; a federal paid leave program, efforts to make child care more affordable, free community college for all, and tax credits meant to fight poverty. The American Jobs Act will also benefit from this tax increase and this act was created to better infrastructure, and address climate change and racial inequalities. By addressing these issues the Biden Administration hopes to create jobs that will fix these problems, grow jobs, and better American’s quality of life.
If you or your business is a high earner, you will, most likely, see a tax increase. If these plans are introduced under a budget reconciliation process, the tax increases will not be permanent. Of course, this is not the first time the American country has seen a significant tax increase. After World War II and in the 1970s taxes increased, and people saw tax rates higher than what Biden proposes (although with significantly more deductions than are available at present).
Biden’s Administration plans to increase taxes for households earning more than $400k yearly. If these bills pass, then they will have funding mechanisms to provide additional funding to the IRS so they can audit more high-end businesses. The top individual tax bracket would be increased from 37% to 39.6%. There would also be an increase in the long-term capital gains tax rate from 23.8% to approximately 48.4% for those earning greater than $1 million annually.
These two bills, if enacted, will also affect businesses. The plan is to raise corporate taxes from 21% to 28%, a big jump, but lower than the 35% rate which prevailed until the enactment of the “Tax Cuts and Jobs Act” (TCJA) was enacted in December of 2017. Additionally, there would be a 15% corporate minimum tax, meaning that even if the company has several tax deductions and tax credits, it will still have to pay taxes on 15% of its earnings. The 15% minimum tax could affect 33 out of the United States’ 100 most prominent companies. If the tax plan is enacted, those 33 companies could pay an extra $20 billion in tax.
While an official plan has not yet been proposed, much less enacted, it’s essential to know what could be coming. In addition to preparing yourself for a potential tax increase, you should also create a succession plan. Succession planning is often something individuals and businesses put off thinking about, but a succession plan can help you avoid many issues down the road.
Continue reading to learn more about how you can help yourself and your business stay ahead of this potential tax increase.
While taking deductions sooner rather than later is the usual strategy, in this case, deferring deductions might help you. If you were to take all of your deductions now, you’d have nothing left to deduct when the tax rate rises. By deferring deductions, you’ll end up paying less in taxes. If you often donate to charities, you can donate less, for the time being, then increase your donations when the tax rate increases. It is, however, worth noting that this strategy will only work if there is not a 28% cap on deductions, which is under consideration.
When you convert your traditional IRAs to Roth IRAs, it allows you to pay taxes on your retirement funds now at your current tax rate, and your retirement distributions will be tax-free. Many people often use Traditional IRAs or 401(k)s to defer their taxes, planning to take distributions when they are in a lower tax bracket. Unfortunately, this does not always work, especially if tax rates increase. You may end up in a higher tax bracket after retirement, especially if you’ve saved a significant amount of money. If you choose to go this route to prepare for the tax increase, it’s best to consider a conversion in 2021 rather than 2022. The tax increase may not be retroactive so it’s better to start sooner rather than later.
Municipal bonds come with many tax advantages. Many are exempt from federal taxes, and some are also exempt from state and local taxes. People who earn high amounts of money can take advantage of this opportunity to lower their taxes. Some municipal bonds are also exempt from the Alternative Minimum Tax. The AMT applies explicitly to those with a high income.
Rigby Financial Group can help you prepare for the potential tax increase. We’re a team full of experienced experts, and we’ll create a specifically tailored plan for you and/or your business. There aren’t many other financial groups that provide the amount of care and concern we do here at Rigby.
Rigby is happy and excited to help you take steps to best prepare you for these potential tax increases, based on your individual situation. We can also help you with many other financial planning services which could benefit you and/or your business.
Contact us today to get started, and we’ll help prepare you for the potential tax increase.