Are You Prepared for the Proposed Tax Law Changes?
Updated: May 29
As the end of the year draws near, taxpayers are frantically trying to get a grasp on the recently enacted changes to the tax law. The standard deduction has almost doubled, but there are new restrictions on the amount that can be deducted for state and local taxes.
Many people are still unsure of what to anticipate in light of the new legislation, which will have a significant impact on the manner in which taxpayers file their return. The IRS has personnel accessible to answer queries, and professional tax preparers are currently engaged in the process of educating their clients on the new requirements.
However, considering that the vast majority of taxpayers have the impression that they are not prepared, it is quite evident that more work needs to be done to assist individuals in comprehending the alterations. The Internal Revenue Service ought to think about expanding its efforts to reach out to the public by doing things like holding educational webinars and distributing instructional DVDs.
The Internal Revenue Service may help to alleviate taxpayers' anxieties and ensure that everyone is prepared for tax season by giving information that is both clear and simple.
Will the Changes Affect You?
In December of 2017, the Tax Cuts and Jobs Act was passed, making significant changes to the US tax code. Some of these changes are set to expire in 2025, while others (such as the higher standard deduction and lower corporate tax rate) are permanent.
The 2022 tax law changes will affect both individuals and businesses. For individuals, the most notable change is the expiration of the $2,000 child tax credit. The credit is currently available to families with children under the age of 17, but it will revert back to $1,000 in 2022. Other individual changes include the expiration of the $250 deduction for teachers and the elimination of the deductibility of alimony payments.
For businesses, the most significant change is the repeal of the 20% deduction for pass-through income. This deduction is often used by small businesses, so its elimination could have a significant impact on their bottom line.
Other business changes include the expiration of the new markets tax credit and the repeal of the interest deduction for certain loans. While some of these changes may seem negative, it's important to remember that they are temporary and that Congress could always extend or make them permanent in the future.
The tax changes will affect a smaller group of taxpayers than in earlier versions of the plan. Nonetheless, the most likely group of affected taxpayers will include those with:
Adjusted gross income equal to or in excess of $400,000
A modified adjusted gross income in excess of $10 million
IRAs or workplace retirement plans with balances exceeding $10 million
Itemize deductions on a federal tax return
Ownership of a limited partnership or S corporation
Current or planned trusts
The current law calls for the highest tax rate – 37 percent applied to income rates as follows:
$314,500 for married couples filing separately
$523,600 for individuals or those filing as head of household
$628,300 for married couples filing a joint return
The new laws call for an increase in the marginal tax rate to 39.6 percent for those with taxable includes of more than $400,000 or $450,000 for those filing jointly.
The rate would go into effect in 2022 and change portions of the 2017 tax laws. In 2026, the projected top tax rate would be 39.6 percent for those with taxable income greater than $501,250.
Under the new laws, taxpayers with a modified adjusted gross income (MAGI) of more than $10 million ($5 million for individuals filing separately) would be assessed a 5 percent surcharge to income above those levels. For incomes in excess of $25 million ($12.5 million if filing a separate return), an additional 3 percent surcharge would be added, for a total surcharge of 8 percent. The surcharges would also take effect in 2022.
Tax Laws Related to GRATs and Other Trusts
There are a number of different tax laws that apply to GRATs and other trusts. The first, and most important, is the estate tax. This tax is imposed on the value of all property transferred at death, including trust assets.
The rate of this tax depends on the value of the property transferred, but it can be as high as 40%. Another important tax law that applies to trusts is the gift tax. This tax is imposed on the transfer of property during life, and the rate depends on the value of the property transferred. For example, if you transfer $1 million to a trust during your lifetime, you would owe $40,000 in gift tax. Finally, there are a number of income tax laws that apply to trusts.
These laws determine how trust assets are taxed when they are distributed to beneficiaries. For example, if you receive income from a trust, you may be subject to income tax on that amount.
As you can see, there are a number of different tax laws that apply to GRATs and other trusts. It is important to consult with a qualified tax professional to ensure that you are in compliance with all applicable laws.
Tax Rates and Brackets
The tax rate is the percentage of an individual's taxable income that is owed in taxes. The tax bracket is the range of incomes to which a tax rate applies. Tax rates and brackets are two key concepts in the United States tax system.
Marginal tax rate, which is the rate applied to the last dollar of income earned, and effective tax rate, which is the total amount of taxes paid divided by total income. Tax rates and brackets vary depending on an individual's filing status and income level. The federal government uses a progressive tax system, which means that higher-income individuals pay higher marginal tax rates than lower-income individuals.
The marginal tax rates for the 2019 tax year range from 10% to 37%. The federal government also offers a number of tax deductions and credits that can reduce an individual's taxable income and ultimately lower their effective tax rate. Tax rates and brackets are complex topics, but understanding them is essential to ensure that you are paying the correct amount of taxes.
Who could be affected by these proposed changes?
Any change to the current tax code will have far-reaching implications for both individuals and businesses. The most obvious impact will be felt by those who are currently in the highest tax bracket.
For many years, they have been able to take advantage of deductions and loopholes that will be eliminated under the new proposal. As a result, their tax liability is likely to increase significantly. Businesses will also be affected by the changes, particularly those that have been operating at a loss in recent years.
Under the new rules, they will no longer be able to deduct these losses from their taxes. This could make it difficult for them to stay afloat in the coming years. Ultimately, these proposed changes could have a significant impact on both individuals and businesses.
Long-Term Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends offer special tax advantages to investors. Long-term capital gains are realized on the sale of investments held for more than one year, and are taxed at a lower rate than ordinary income.
Qualified dividends are those paid by certain corporations that meet certain criteria, and are also taxed at a lower rate than ordinary income. For both long-term capital gains and qualified dividends, the tax rates are currently 0%, 15%, or 20%, depending on your tax bracket.
However, it's important to note that these tax rates are set to increase in 2026, unless Congress takes action to extend them. As a result, now is a good time to consider realizing gains on your investment portfolio. And if you're thinking of reinvesting those gains into new investments, remember to factor in the potential impact of higher taxes on your overall return.
Estate Tax Exemption and Estate Tax Rate
Current law allows for trusts to shelter income from current taxation. Individuals can also exempt up to $11.7 million in combined lifetime gifts and estate value from any estate tax.
The new law would put a 5 percent surtax on adjusted gross income of a non-grantor trust that generates more than $200,000 in income per year. An additional surtax of 5 percent (for a total of 8 percent) would apply to trusts with income more than $500,000.
Earlier versions of the Build Back Better Act accelerated the expiration date of the $11.7 million exemption, currently slated for 2025, to a level of about half that amount. However, those proposals are not a part of the current plan.
It is prudent to review your estate plan to determine what impact these changes may have on your heirs.
Changes to IRAs
The proposed law would affect those with aggregate balances of $10 million or more in retirement accounts. Those individuals would be prohibited from making additional IRA contributions if their income exceeds $400,000 (single taxpayers), $450,000 (married filing jointly, or $425,000 (head of household).
Changes would also be made to the minimum required distributions for those with more than $10 million at the close of the prior tax year.
At Solas Wealth, we help individuals and families maximize their returns, plan for the future and make smart investment choices. Speak to one of our trusted financial advisors today to help you plan for the coming tax changes and keep your money protected.