Your Financial Future: Tax planning important as proposed changes loom
President Biden is proposing changes to the tax code.
While he has often said that no one’s taxes will go up who earns $400,000 or less, the reality is that most people taxes will go up on Jan. 1, 2026. On that date, the Trump tax cut (TCJA) expires and we revert to the higher rates that preceded it.
Then, the personal exemption was lower and many of the tax brackets for middle income workers were higher. The second tax bracket used to be 15% and is now 12%. This goes up to an income of $81,050 and will affect many middle-income workers.
Another challenge of only hiking taxes for the rich is that there are many types of income taxed at different rates. For 100 years there has been a lower tax rate for capital gains. Congress did this to encourage investment in companies and other assets. This might include your house, business or family farm.
Some tax analysts have said that under proposed changes, some capital gains may actually end up being taxed at a higher rate than ordinary income. The latest Treasury Department’s Greenbook released last Friday even wanted some changes made retroactive to April 28.
The White House has called for the top tax rate to increase to 39.6% from 37% for the top bracket. They say this is a 2.6% increase. Under the TCJA, people did not reach the top rate until income was $628,300 when married filing jointly. It has not yet been explained whether some upper middle class families be exposed to an extra 4.6% instead of 2.6%. The Obamacare NIT taxes would still add 3.8% additional to many of these returns.
Biden also wants to eliminate stepped-up basis for many tax payers.
This is when certain assets are valued at the date of death of the previous owner. The beneficiary inherited those assets at this new value. It may be possible for some low income people to see a big jump in this area.
Decades ago, homeowners kept detailed records of cost when putting on a new roof or other maintenance to their house. This was to adjust basis when selling the home to help reduce capital gains tax. This had become unnecessary for many people since several years ago the tax code was amended so that a couple could exclude up to $500,000 capital gain from their primary residence if they lived in it for two of the past five years. Detailed record keeping could become important to many who have not had the need to do so under the old law.
Tax and IRA expert Ed Slott said this week the proposed changes in stepped-up basis “would add a layer of double taxation since these gains will be taxed as both income and estate taxes.” Slott said, “Even with the proposed $1 million exemption, this tax would still fall heavily on all of the wrong targets-like homeowners and small business owners.”
The president also wants $80 billion to hire IRS agents to audit many more tax returns. It is speculated that these agents will look at many small cash businesses such as restaurants, beauty shops and small retailers.
None of these proposals are law yet. There may be changes that no one knows. These changes are not going to affect only the super rich. There just are not enough of them. Tax planning is going to be even more important than before.
Remember, the deficit is increasing at a record pace and these proposed changes will not reduce it at all. Be active. Reach out to Congress and tell them to stop mortgaging our grandchildrens’ futures. The question is, are we paying too little in taxes or are they wasting too much of our money?
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.