Many tax and financial professionals are of the opinion that taxes (federal income taxes, state income taxes, capital gains taxes, estate taxes…) have nowhere to go but up.
How high can they go and who will they affect? What changes are being proposed in upcoming years, and will all of them negatively affect our bottom line?***
1. Increased individual federal income taxes
The Tax Cuts and Jobs Act of 2017 (TCJA) decreased tax brackets form 10, 15, 25, 28, 33, 35, and 39.6 percent, to 10, 12, 22, 24, 32, 35, and 37 percent, respectively. TCJA is set to “sunset” in 2025, and without legislative intervention, tax brackets will return to their former pre-2018 values.
This means that the highest tax bracket might increase from 37% to 39.6%.
2. Capital gains taxes and taxes on dividends
Currently, long-term capital gains are subject to tax rates of 0, 15, or 20%, depending on an individual’s taxable income.
These rates generally only apply to realized capital gains, e.g. when a capital asset is sold or otherwise disposed of.
Capital gains may be increasing for those in the highest tax brackets (support has been indicated for a top rate of 28% for long-term capital gains).
However, for those with wealth exceeding $100 million dollars, unrealized capital gains may also be subject to taxes.
3. Estate tax increases
The TCJA doubled the exclusion amount applicable to estate, gift, and generation-skipping transfer tax. For 2024, this results in an inflation-adjusted exclusion of $13.61 million. Without extension of the TCJA, this exclusion amount will be halved (subject to inflation adjustment) for transfers occurring after 2025.
4. Business taxation
Corporations. Under current law, the corporate tax rate is set at 21%. Before the passage of the TCJA, corporations were subject to a progressive tax structure, with rates reaching as high as 35%.
There is a proposal to increase the tax rate on corporations to 28%.
Small businesses. Currently, small businesses are largely taxed in a similar manner to other businesses and corporations. Although there are a few specific advantages for smaller enterprises, such as the use of the cash method of accounting and lower limits on interest deductions, these benefits are relatively limited.
However, things might be looking up for small businesses in the future. The deduction for start-up and organizational costs may be increased to $50,000, compared to the current $5,000 limit. Additionally, a standard deduction for small businesses might be introduced.
5. Taxation of tips
Tips received by restaurant and hospitality workers may no longer be subject to ordinary income taxes; taxes on tips might be eliminated (0%).
Summary
While not all of the above proposed changes are negative, certainly an increase in federal tax brackets is reason to worry for Americans already struggling with inflation.
Tax reduction planning might be more important now than ever before!
Schedule a no-strings call with a Tax Reduction Adviser at Ratio CPA to learn about your options: https://ratiocpa.com/schedule-a-call/
***All proposed regulatory changes as of the time of writing this article.