Congress is currently debating President Biden’s American Families Plan of tax and benefit changes. The Plan would make sweeping changes to our individual tax system. Although we do not know specifics about many of the changes, we do know, in general, what the changes will be should this Plan become law. We wish to make you aware of some of the potential upcoming changes.
Individual Tax Rates
As a general premise of the Plan, tax rates will increase for higher income Americans. The latest proposal includes an increase in the tax rate, a possible addition of an additional surtax, and a huge lowering of tax brackets. As a general rule, this means that higher income Americans who have the opportunity to do so should accelerate income into 2021 and defer expenses until 2022.
Capital Gains Rates
Capital gains rates will also see big 2022 changes. Some suggestions have been made to make these changes retroactive, but assuming they do not go into effect until 2022, a prudent tax move would be to go ahead and recognize gains on investments and real estate in 2021 in order to minimize the income tax burden. The rate change is still fluctuating, but the bottom line is that the rate will increase.
The existing high credit amounts for children and child-care would continue under this plan, so no action is required to benefit from these changes.
Small Business Owners
Of particular concern are the massive changes proposed for small business owners, with large increases for self-employment tax at all income levels, not just high-income levels. The proposals would affect operating businesses as well as business asset sales.
Home and Property Sales
Because of potential increases in capital gains rates, homeowners and property owners that are considering the sale of their home, building, land or farm at a large profit need to plan carefully before finalizing such a sale. Potential changes in line for tax-free exchanges in 2022 is another reason that property owners plan carefully before moving forward with the transaction.
Estate and Gift Tax Changes
We do not know exactly what will change here, but changes are likely coming for taxes due at death. These changes could affect everyone, not just wealthy Americans.
Taxes will almost certainly be going up in 2022 for wealthier Americans and for small business owners. You should reach out to your tax advisor if you believe you have a situation where the timing and structure of your income and/or deductions can be managed.
–Todd B. Bullinger, CPA, MBT