Eyes on Tax Reform
Like many Americans in the business community, we try to stay on top of tax reforms and how they affect our industry. As 2021 comes to a close, several key tax rates were just released that significantly impact high-income and/or high-net-worth taxpayers and all business owners.
4 key tax updates
1. Capital gains tax. For 2022, for a single person taxable income of $41,675 – $459,750, the capital gains tax rate will be 15 percent. For income over $459,750 (single), $258,600 (married filing separately), or $488,500 (head of household) the capital gains tax rate is 20 percent.
2. Net investment income tax (also known as the 3.8 percent Medicare tax). In addition to the capital gains tax, you may need to pay a 3.8 percent surtax on net investment income. Net investment income includes things like taxable interest, dividends, gains, passive rents, annuities, and royalties. The surtax applies if you are a single taxpayer with modified adjusted gross income (AGI) over $200,000, a married couple filing a joint return with modified AGI over $250,000, or a married person filing a separate return with modified AGI over $125,000.
Kiplinger.com recently reported that under the version of President Biden’s Build Back Better plan currently in Congress, the surtax would be expanded beginning in 2022 to cover net investment income derived in the ordinary course of a trade or business for:
-A single or head-of-household filer with modified AGI over $400,000
-A joint filer with modified AGI over $500,000
-A married person filing a separate return with a modified AGI over $250,000
The plan also clarifies that the surtax doesn’t apply to wages on which Social Security and Medicare payroll taxes (i.e., FICA taxes) are already imposed.
3. Surtax on modified adjusted gross income. Effective January 1, a 3 percent surtax would be imposed on modified adjusted gross incomes over $5 million for single individuals, heads of household, married individuals filing jointly, and surviving spouses. For married individuals filing separate returns, the 3 percent tax applies to modified adjusted gross income in excess of $2.5 million. For estates or trusts, the 3 percent tax applies to modified adjusted gross income that exceeds $100,000.
4. New limits and rules on retirement accounts. A $10 million applicable dollar limit would be applied to aggregate accumulations for wealthy taxpayers’ retirement accounts. This means that when a taxpayer meets the income criteria established in the tax bill, no annual additions may be made by that taxpayer to any IRA, or it will be subject to an excise tax for excess contributions. Additionally, taxpayers whose retirement account balances exceed $10 million will be required to make increased required minimum distributions (RMDs), adjusted for inflation.
Businesses should be reviewing their books year-to-date and working with their tax advisers to devise tax strategies in light of possible law changes.
Tax implications are only one factor in how to time and close a deal for maximum profit. If you are considering selling your business, please contact us for a confidential discussion of your specific situation. With over 100 years of combined experience, Symmetrical Advisory provides sophisticated sell-side merger and acquisition solutions to middle-market companies located throughout the United States.
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