What 6 Possible Tax Changes in 2021 Will Mean For You

Pretty much every administration changes our taxes, and I just want to say: Pull it together! Make a decision already and stick with it, people! 😤

Biden's American Families Plan and the American Jobs Plan were unveiled last night, and boy is that a doozy! These have an uphill hike to be passed... but we're not a political blog here- we focus on the numbers 👍

Here are the top 6 tax changes that the Biden plan proposes, and our "Big Deal Or Not" rating:

• 1. Raising tax rates on the wealthy 📈

Big Deal for most of us? NO

Big Deal for the IRS? YES

What is it? It's a pretty small tax increase- only 3%- and puts tax rates back at 2017 levels. 2017 tax rates are almost all-time lows for the country! And, it will only affect very few earners.

Who will it affect? Those who earn over $500k, or families earning over $622k- that 0.67% of American households. So yeah, kinda weak: not impressive for those who want to “tax the rich!”, and not scary for those who are the rich 🙄

Effect on the IRS: One year’s income from this change, will pay for 50 days of America’s federal budget. Pretty significant 😲

• 2. Raising capital gains taxes

Big Deal for most of us? NO

Big Deal for the IRS? YES

What is it? The capital gains rate will rise from 20% to 39.6%, again only for top earners. This will negate the advantage that wealthy people have when most of their income is from capital gains. Instead of paying 20% in taxes, they’ll be paying almost twice that. This also means that the rest of us, who are trying to get ahead, will get more perceived benefit from investing in capital assets. Over time- IF this tax increase doesn’t change over time- this could reduce the wealth gap between the middle class and the wealthy.

We haven’t seen capital gains rates this high since the 1970s

Who will it affect? Again, only top earners- those who earn over $500k, or families earning over $622k

Effect on the IRS: Instead of having an average tax rate of 23%, these top earners could have an average tax rate in the 30% range. That’ll also mean that one year’s income from this change, will pay for 52 days of America’s federal budget. Also pretty significant!

• 3. Reduce estate tax threshold

Big Deal for most of us? NO

Big Deal for the IRS? Not Really

What is it? When wealthy people kick the bucket, they pass their assets on to their heirs. Assets over a huge amount- currently almost $12 million- get taxed; this affected about 1,900 people who died in 2018. However, Biden’s plan will reduce that threshold to $3.5 million. That will mean that many more households will have to file or pay estate taxes… but there’s a BIG BUT:

- The estate tax will only affect people who die between now and when estate taxes are changed again. And remember, taxes change every 2-4 years, on average 🙄

- Estate tax returns work like regular tax returns- there are deductions, exclusions, and exceptions galore. There are currently 4 million American households with $3.5 million or more in assets, but about half of them will be able to avoid paying anything in estate taxes

Who will it affect? Those with over $3.5 million in assets, after death, and after an estate tax return with its deductions, exclusions, exemptions, and exceptions is filed 😉 So- roughly 7,000 people

Effect on the IRS: Hard to say, but 7,000 people paying an extra $350k (for the ultra wealthy) would only pay for about 4.5 hours of one day of federal spending

• 4. End “angel of death” loophole

Big Deal for most of us? NO

Big Deal for the IRS? Not Really

What is it? But currently, heirs get to avoid taxes on capital assets due to the “angel of death” loophole. That means that, when an heir received shares of stock, all capital gains get wiped clean; heirs will only pay capital gains on gains that happen in their lifetime.

This can be a huge amount of money! Why isn’t this a big deal? Two reasons: Yes, wealthy people (and their heirs!) will pay more in taxes… eventually. But remember the part where they’re wealthy? They’ll find other ways to protect themselves. And second, this only kicks in after death; this will not have an immediate effect on IRS income.

Who will this affect? Those who pass on capital assets (like stocks) to their heirs

Effect on the IRS: Between wealthy people shifting their estate planning strategies; possible death rates; the average amount of wealth per person; and how this may be implemented, it’s impossible to estimate here, but the effect is unlikely to be significant 🤷

• 5. Limit 1031 exchanges

Big Deal for most of us? If you’re a renter- YES 😥

Big Deal for the IRS? YES

What is it? Currently, if you sell a piece of real estate, you have to pay capital gains taxes on your profit. However, if you immediately buy another piece of real estate, you don’t have to pay those capital gains taxes. Biden’s plan will say that you can’t do that, if your profit is more than $500,000.

This won’t affect most of us- even those of who have real estate investments & real estate income. However, it will affect bigger landlords- people who own strip malls, big malls, apartment complexes, and more!

But… who do you think will really pay the price? Sadly, we’re likely to see rents increase if this happens. Since about 1/3 of American households are renters and not homeowners, this could negatively affect a big chunk of our population 😖

Who will this affect? Those who own millions of dollars in real estate

Effect on the IRS: Also impossible to estimate here, but this could have a significant increase in IRS income 🤷

• 6. Increase reporting of large transactions

Big Deal for most of us? NO

Big Deal for the IRS? Not Really

What is it? Currently, the IRS is seriously understaffed. Auditing of wealthy people dropped from 2010- 2018, with an estimated 20% of wealthy people’s incomes not being reported at all. Tightening restrictions on how banks report transactions could eliminate that loophole.

Who will this affect? Again, only top earners- those who earn over $500k, or families earning over $622k

Effect on the IRS: An estimated increase of $1.4 trillion per year could keep the lights on for about 2.5 hours of one day of federal spending 🤷

Tax changes are scary, so now you know- almost none of these changes will affect the average Joe!

Now That's Smart Money 🧐