Potential Effects of The American Jobs Plan
In the last year, tax preparation has seen a major shift due to a variety of unforeseen circumstances, namely the pandemic and a new government administration.
The new administration is currently proposing to raise the corporate tax rate from 21% to 28%. As we begin to quell COVID, businesses will open up more and more to the global markets like they did before the pandemic. In order to mitigate these businesses paying less tax while doing business in other countries, Biden’s proposal also calls for a minimum global tax.
As these proposals are still up in the air, it can be difficult to help clients form a plan going forward. Instead, we have to plan for what we know will happen and be prepared for everything else. Even if the proposals, as they stand, do not pass, there will very likely be changes coming. These may include some type of change to income tax and capital gains tax.
Taxpayers making over $1 million a year may see their rates end up at 39.6%. This means tax planners should begin preparing for these changes by managing income to keep it below the $1 million dollar threshold. For instance, municipal bonds are not taxable. So moving other income such as unrealized investment gains into municipal bonds can potentially lower income below $1 million.
Small business owners may especially be affected. If a small business owner decides to sell their business after (and if) the proposals become law, they may not get the same preferential tax rates they would have been given before. Of course, we will need to wait and see what the final legislation looks like, but currently this looks like it may happen.
In addition to the tax hike to income, the same 39.6% rate may be applied to capital gains.
However, capital gains and income are not the only effects we may have to account for. One of the most popular ways used to reduce income in 2020 was deductions for working from home. This may no longer be the case for employees. However, self-employed or gig workers are still eligible for the deductions.
This makes it somewhat difficult for clients to know whether they should be making financial changes now, or waiting to see what happens. Acting now may save them money if the bill passes, but it may cost them in the long run if some of these proposals don’t make it into the final bill.
There might be some situations where it is still worth it to hold onto assets despite the rise in tax. If the assets’ appreciations are expected to exceed the rise in taxes, holding might still be a viable option.
In order to come up with the best possible plan for clients, tax preparers need to really take into account the client’s positions and what those might mean if the new tax bill passes, as well as if the bill changes considerably before becoming law. In other words, have a plan for whatever may lie ahead.
It’s imperative for CPAs to educate themselves on the nuances of both their clients assets as well as the new bill. This includes the strategies needed to best protect their clients, such as trusts and gifting money as well as the strategies listed above.
If your client is serious about potentially selling their business, this year might be the opportune time before the new tax hikes take effect.