The House Democrats have put forth a series of tax hikes designed to largely cover the cost of the $3.5 trillion spending proposal championed by President Biden. The proposed tax hikes are aimed at wealthy individuals and corporations.
Some of the key elements of these proposed tax hikes include:
- Increasing the top corporate tax rate to 26.5% and the top individual rate to 39.6%.
- No tax increases on those with incomes less than $400,000.
- Increases in the capital gains tax rate and a surcharge on those with incomes in excess of $5 million.
How will these changes impact you?
These changes will impact individual taxpayers in several ways.
New tax brackets for individuals
Perhaps the biggest change is the increase in the top tax rate to 39.6% for individuals earning $523,000 or above. This is a higher threshold than the $400,000 originally proposed by the president.
The top rate on long-term capital gains taxes would be increased from 20% to 25%. The 3.8% Medicare surtax would apply to those in the top bracket for capital gains, in 2021 this is $445,850 for individuals and $501,600 for those who are married and file jointly. This would bring the top rate to 28.8% for these taxpayers.
The proposal also calls for a surcharge of 3% on adjusted gross income in excess of $5 million ($2.5 million for those filing married and separately).
There is also a proposal to lower the thresholds for estate taxes in 2022, accelerating the sunset provisions in the current tax rules.
These and other proposed tax hikes will force those taxpayers who would be impacted to do some tax planning to mitigate the impact of these changes if passed. This might include the timing of income recognition or other tactics.
While the increase in the capital gains tax is not as bad as the 39.6% rate proposed by the president, this can still have an impact on investors selling large positions in highly appreciated securities.
Increased IRS enforcement
Another provision of the Democratic proposals included increasing funding for the IRS to help them increase their enforcement activities. The proposal included an additional $80 billion for the agency.
According to some estimates, the top 1% wealthiest Americans have avoided an estimated $163 billion in taxes annually. The funding increase would allow the IRS to collect an additional $200 billion taxes over the next decade according to some estimates, though IRS estimates put this number closer to $700 billion.
Much of this enforcement would be directed at “opaque sources of income” used by wealthy taxpayers. According to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig the compliance rates for this type of income is only around 50%.
Yellen has stated that IRS audit rates would not increase for taxpayers earning under $400,000, only for those earning more than that figure.
The proposed rules would also increase reporting requirements by financial institutions regarding certain types of income.
Changes to corporate taxes
The proposal also includes changes to the corporate tax rates. Under the House proposals the top corporate tax rate would be increased from 21% to 26.5% for corporations earning in excess of $5 million in annual income. The rate for companies earning less than $400,000 in annual income would decline to 18%.
The increase on large corporations could be severe and will certainly motivate their corporate tax departments and outside advisors to devise ways to reduce their taxes where possible. These changes could impact the earnings of some corporations and potentially weigh on their share prices.
Overall impact
The overall impact of these proposals, if passed, will be higher taxes on high income and net worth individuals. The higher corporate taxes could impact earnings for some major corporations.
Investors will want to monitor the progress of these proposed changes and any alterations to the legislation that might occur. You will want to stay in contact with your tax advisor and your Wedbush financial advisor to make any changes in your planning or investments that may be warranted.
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Disclosure
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.