What About Taxes for Next Year? Some Good News – Sort of
December 7, 2021
We are busy developing year-end tax projections and meeting with our clients, and the common question these days continues to be “What about taxes for next year?” That is, what tax increases should we expect based on what’s going on in Washington, DC. As we await the Democrats in the Senate to finalize the Build Back Better (“BBB”) bill that the House passed, I can tell you that as things stand today it is not be nearly as bad as we thought.
Not included in the BBB bill passed by the House:
- Top marginal tax rate increase – stays at 37%;
- Top capital gain rate increase (before surtaxes) – stays at 20%;
- Qualified Business Income (“QBI”) deduction of 20% for passthrough businesses such as S Corps and LLCs – stays in place with no income limits until it is currently scheduled to sunset in 2025;
- Section 1031 exchanges – unchanged with no new limits added;
- Itemized deduction limits based on elevated income – the 3% so-called “Pease Amendment” is not in BBB;
- Estate tax unified credit reduction – unchanged and still over $23 million for a married couple;
- Estate tax rates – unchanged;
- Estate tax basis step-up rules at date of death – unchanged;
- Grantor Trust rules – unchanged;
- C-Corporation tax rates – flat 21% rate is unchanged.
So, what is in the BBB for income taxes that we should be concerned about:
- If your income is considered very high:
- Surtaxes are added for individuals with income levels over $10 million (add 5%) and also $25 million (adds another 3% rate so that’s an 8% surtax);
- C-Corporations with financial statement income over $1 billion would face an Alternative Minimum Tax of 15%;
- State & Local Tax (“SALT”) itemized deduction currently capped at $10,000 would be increased. House BBB has that at an $80,000 cap;
- Net Investment Income Tax (“NIIT”) of 3.8% will apply to passthrough income if your income is over $500,000 for married filing joint ($400k for single) taxpayers. This is a direct hit to S Corps shareholders, LLC members, and trusts & estates.
Qualification: the above is just an overview focused on the main income tax areas and there are plenty of additional complexities.
And there’s much more as we await the Senate’s maneuvering on the BBB bill. For example, BBB includes tax changes in these additional broad areas:
- Income tax credits such as energy and research & development credits;
- Retirement plans including IRAs;
- International Taxes; and
- Definitions, expiring provisions, and so on.
As always, the “devil is in the details” and we continue to await more details. But this is where we stand right now.
So, for year-end tax planning, accelerating taxable income into 2021, where feasible, may still be an option but right now it looks like it is not a necessity. That is, because next year’s taxes are not nearly as bad as we thought, i.e., unless you have income over the $10 million.
Right now, as we continue to review 2021 tax projections there are a few basic messages:
- Next year’s taxes will increase (i.e., NIIT surtax) but it may not be as bad as we thought. Consider this as you evaluate certain types of income and transactions that may or may not close by year-end.
- Take advantage of tax deductions and credits that are, in fact, available.
- And take advantage of other credits that are available including the Employee Retention Credit (“ERC”), which is a payroll tax credit now available to all businesses with employees even if you took a PPP loan.
- We are very busy working with our clients on both the basic credit for gross receipts reductions AND also documenting the ERC for what’s technically considered a “partial closure” under the rules.
- So, if your quarterly receipts in 2020 & 2021 did not decrease enough (compared to 2019) to meet the 50% or 20% thresholds you still have an opportunity to get the ERC!
Lastly, it looks like we may need to accept that taxes will likely increase in the future whether or not the BBB is passed. In my opinion this is just something that will happen because it’s not just the BBB bill but all of the net-spending laws that have passed since Covid-19 hit. The 2020 Cares Act and everything since have substantially increased our national debt and will need to be paid at some point.
Call us today and we’ll help you navigate these details.
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