- February 23, 2021
- Posted by: Dan Gordon
- Category: Accounting Advice
With a delicate economy and a pandemic that’s still raging, I believe President Joe Biden’s administration has too much on its plate and will be reluctant to support a tax-increase agenda during 2021.
That said, we will get through the pandemic and the massive government stimulus program will need to be paid for. Therefore, tax increases will be on the horizon, hopefully just not in 2021. It would be prudent, though, to be thinking about what those taxes will look like and how they may affect the pest industry. Here are some taxes that, based on election promises, could be enacted in the future.
Higher Maximum Individual Tax Rate
The Democratic proposal is to raise the top individual rate on ordinary income and net short-term capital gains to 39.6 percent, which was the top rate before tax reform lowered it to 37 percent for 2018–2025. However, the plan is there will be no increased taxes “on anyone making less than $400,000 a year.”
Limit on Tax Savings from Itemized Deductions
The Democratic plan would limit the tax benefit of itemized deductions to 28 percent for upper-income individuals. In other words, each dollar of allowable itemized deductions could not lower your federal income tax bill by more than 28 cents, even if you are in the proposed 39.6 percent maximum tax bracket. Also, for upper-income individuals, the prior rule that reduced total allowable itemized deductions above applicable income thresholds will be reinstated.
Note: It appears the Democrats favor the repeal of the current $10,000 cap on itemized deductions for state and local taxes. This proposal could be met with bipartisan support. This is huge for those living in states that have high income and real estate taxes.
Higher Maximum Tax Rate on Individual Long-Term Capital Gains
Higher-income individuals also would face increased federal capital gains. Under current law, the maximum effective federal income tax rate on net long-term capital gains recognized by individual taxpayers is 20 percent. Under the proposed plan, net long-term capital gains collected by those with incomes above $1 million would be taxed at the same 39.6 percent proposed maximum rate that would apply to ordinary income and net short-term capital gains. That would be almost double the current maximum effective rate of 20 percent. While most people will not have incomes of more than $1 million, in the year of a business sale that number could be easily dwarfed.
For those thinking about selling their businesses, this move could significantly impact after-tax proceeds to the negative. We encourage you to contact us to quantify this negative affect.
Higher Social Security Taxes (Withholding Taxes) for Upper-Income Individuals
Under current law, the 12.4 percent Social Security tax hits the first $142,800 of 2021. Employees pay 6.2 percent via withholding from paychecks, and employers pay the remaining 6.2%. Self-employed individuals pay the entire 12.4% out of their own pockets via the self-employment tax. The Biden tax plan would restart the 12.4% Social Security tax on wages and net self-employment income above $400,000. This plan is the so-called donut-hole approach to increasing the Social Security tax.
Elimination of Basis Step-Up for Inherited Assets
Under current law, the federal income tax basis of an inherited asset is stepped up to fair market value as of the decedent’s date of death. So, if heirs sell inherited capital-gain assets, they only owe federal capital gains tax on the post-death appreciation, if any. This provision can be a huge tax-saver when we are talking about a greatly appreciated inherited asset, such as business assets from parents acquired many years ago. This is a “biggie,” so you should discuss these prospects with your tax adviser.
While no one knows what the future tax laws will ultimately look like, pest business owners should stay well read and understand the implications to their personal situations.