As many are aware, several of the tax laws have been up in the air, creating uncertainty among many. It is likely that many of the current tax proposals may pass before the end of the year and have retroactive dates, so it is important to be prepared.
President Biden has proposed an increase of the top individual tax rate from the current 37 percent to 39.6 percent, affecting those with taxable income greater than $400,000. Whether this is a rate for a single tax payer or married filing joint taxpayer is still unknown. It is important to note that this increase was already scheduled to change in 2026, due to the fact that the 2017 tax law changes were only temporary.
Under the current administration’s proposal, the tax rate for C corporations would increase from 21 percent to 28 percent.
Social Security Taxes
A significant potential change applies to Social Security tax on wages above $400,000. Currently, employees and employers each pay 6.2 percent on the first $142,800 of wages. While this would remain the same under Biden’s new proposal, Social Security Tax would again be assessed on wages that exceed $400,000, creating a wage gap from $142,800 to $400,000, where Social Security tax would not be assessed.
It is important to note that this is in addition to Medicare taxes of 2.9 percent to 3.8 percent, which are also paid on an unlimited amount of wages.
Capital Gains and Qualified Dividends
This potential change would impact the highest-earning taxpayers the greatest. Under President Biden’s proposal, taxpayers earning over a million dollars would be taxed at ordinary income tax rates for capital gains and qualified dividends. Currently, the tax rate on long-term capital gains and dividends for taxpayers in the highest tax bracket is 20 percent, plus 3.8 percent net investment income tax under the Affordable Care Act, for a total of 23.8 percent. Under this new proposal, capital gains taxes for those making more than a million dollars would go up to the 39.6 percent rate, and quite possibly could have still have the 3.8 percent surtax on top of that.
Under the current proposal, the value of itemized deductions for those in the highest tax bracket could be capped at 28 percent. For instance, if one is being taxed at the 39.6 percent rate, they could only get a benefit of 28 cents for each dollar on a mortgage interest deduction instead of 39.6 percent thereby limiting their ability to reduce their taxable income.
Currently, childcare costs can be used toward the child and dependent care credit up to $3,000 per child, or $6,000 for multiple children. If one’s adjusted gross income is above $43,000 the credit is limited to 20 percent of those expenses.
The proposal being considered includes an increase in eligible expenses to $8,000 for one child and $16,000 for multiple children, with a credit of up to 50 percent of those expenses available for taxpayers earning up to $125,000.
Gift and Estate Taxes
Current estate and gift tax exemptions are over $11 million per person, however under President Biden’s proposal, the estate tax exemption would be reduced to $3.5 million and the gift tax exemption $1 million.
While we do not know what proposals will become law or what date they will take effect — some may revert to January 1 of this year — we cannot emphasize enough the importance of planning.
This is only a general overview of what may be on the horizon. Please contact our firm so that we can assist you in mitigating your tax liability. We have offices throughout Central Oregon, Eugene and North Idaho.
Capstone CPAs, LLC, 698 NW York Drive, Bend, OR 97703