As Congress and the President continue to negotiate how they are going to raise taxes there are items under discussion that will have a major impact for small business owners. The issues listed below are under discussion, as of Nov 5, 2021. No knows what will actually be passed. If they are discussing these additional taxes, they may come to reality at some point in time.
PROPOSED INCOME TAX CHANGES
Income Tax Rates. In 2022 the highest ordinary income tax rate for individuals could be increased from 37% to 39.6%. Congress will also lower the income in which this tax rate applies to. It will kick in if your income is over $450,000 for married and $400,000 for single.
Income Tax Surcharge. One way to tax the rich, add a 3% surcharge tax on individuals with more than $5 million adjusted gross income.
Capital Gain Rate. They are proposing to replace the 20% tax rate with 25% and would apply when taxable income hits $517,200 for married and $459,750 for single.
Net Investment Income Tax. Currently a 3.8% tax is paid on investment income such as interest, dividends, capital gains and passive income for taxpayers with more than $250,000 for married couples and $200,000 for single taxpayers. The big change applies to S-corporation shareholders, partners and LLC members. For income that is not subject to self-employment tax, that income would apply to the 3.8% tax on that income. This will reduce the tax benefit of being taxed as an S corporation.
Qualified Business Income Deduction. They are proposing to a cap of $500,000 for married and $400,000 for single taxpayers, starting in 2022. This will impact businesses with more than $2 million in pass thru income.
PROPOSED IRA CHANGES
IRA Restrictions. For individual who have retirement balances over $10 million future contributions to these accounts will be prohibited. Congress will also increase the required minimum distributions once they are required.
IRA Investments. They want to prohibit an IRA from investing in a corporation, partnership, trust or estate in which the owners have 50% or more interest or is an officer. They are discussing a 2-year transition period for IRA’s that are currently holding these assets.
PROPOSED ESTATE CHANGES
Estate Exclusion Amount. Currently if your estate is over $11.7 million per person it is not subject to estate or gift tax. Under current law it will change to $5 million in 2026. Congress want to have this start in 2022. If your estate is over $5 million or $10 million if your married, it may be time to review your estate situation.
This is just a high-level overview of the changes that I feel will impact small business owners and for discussion only. Once we are more certain of the changes we can plan accordingly. This year might be the year to review your election to be taxed as an S corporation. Note that timely S-election changes are due March 15 of the year you are considering making the change.
If you want to know more about how they will impact you, please contact our office to set up a tax strategy meeting.