For many years, I have attended advanced tax planning conferences in Las Vegas. Last summer, I did not physically go, everything went virtual, as it will be this year as well. That’s just not the same. A great friend, CPA and classmate of mine at Texas A&M and I would meet there annually and when we were together all conversation revolved around tax. Our spouses would make fun of our continuous “tax talk.”
Well, we have plenty of tax to talk about in 2021. How do you plan when you don’t know what is going to happen? At this point, all we really have to go by is the Biden administration tax proposals. With Biden in the White House and a Democratic-controlled Congress a lot can change, but can he really get all he proposes? It will be interesting to watch the negotiations.
Biden’s proposals purport to generally raise taxes for those with incomes above $400,000. The last major tax legislation was in 2017, and the top ordinary income tax bracket dropped from 39.6% to 37%. However, Biden’s proposals would reinstate the 39.6% rate. The tax benefit of itemized deductions would be limited to 28% if you are in a higher bracket along with a reduction of itemized deductions of 3% of income above certain thresholds. The proposals eliminate the $10,000 limitation for state and local taxes.
In addition, for those with incomes over $400,000, there will be a punishing Social Security Tax increase. Currently, the 12.4% Social Security Tax stops at $142,800. Under the proposals, the 12.4% Social Security Tax will start again at $400,000 with no limitation.
For those with incomes over $1,000,000, net long-term capital gains would be taxed at 39.6%, which combined with the Net Investment Income Tax (NIIT) of 2.8%, adds up to 43.4%. This is double the current maximum effective rate.
There is a proposal to eliminate the step-up in basis for inherited assets. This is not just for high-income taxpayers. Think about the home or farm that Mom and Dad have owned for 40 to 50 years, or the equipment, or the livestock. What is the tax basis? You might become a high-income taxpayer in the year you sell your inherited assets.
There is a proposal to eliminate real estate tax breaks — not just for high-income taxpayers. So long to the $25,000 exemption from passive loss rules for rental real estate for middle-income taxpayers. Also, the elimination of 1031 Like-Kind Exchanges that allowed deferral of capital gains taxed on swaps of real property.
There is a proposal to eliminate deductions for oil and gas drilling expenses and deductions for depletion. This is starting to make my stomach hurt. C-corporations, your tax rate will increase from 21% to 28%.
There’s more folks. I have not even touched on the Estate and Gift Tax Proposals. Do not delay the preparation of your 2020 tax returns and doing some serious planning with your CPA and financial adviser.