Tax laws change almost every year. However, most people hardly notice the change, and the impact on their taxes are minimal. If you want to be more proactive about planning for your taxes so that you can save more with each return, we encourage you to stay aware of the proposed changes to tax laws and their progress through Congress. This can allow you to better prepare for the tax law changes that will most directly impact you. In this article, we’ve outlined some of the bigger changes that will likely impact the largest number of people. However, we encourage you to speak to your CPA to learn more about how the proposed changes could impact you.
Changes to Tax Rates for High-Income Individuals
There are several proposed changes currently being considered that would impact those in the higher tax bracket. Here’s what you need to know about those changes:
- Lowering threshold for top tax bracket – Currently, the highest tax bracket includes individuals with more than $539,900 of income and joint filers with over $647,850 of income per year. Proposed legislation would lower the minimum income for that top tax bracket to include individuals with over $400,000 and joint filers with over $450,000 in annual income.
- Increasing tax rate for top tax bracket – In addition to expanding the top tax bracket to include more taxpayers, current proposed tax changes would increase the tax rate on that tax bracket. The current tax rate for the top bracket is 37%; proposed legislation would increase it to 39.6%.
- Adding minimum tax requirement – Another proposed change would implement a minimum 20% tax rate for all taxpayers with over $100 million in total wealth. This tax rate would apply to all income, including unrealized capital gains. There is no current minimum tax requirement for individuals.
While this last change would only impact a small percentage of Americans, the first two proposed changes listed above would likely change the tax situation for many of our clients. We encourage you to stay abreast of these proposed changes so that you can plan accordingly, should this legislation be passed for tax year 2023.
Changes to Taxes on Investments
Taxes on investments, including long-term capital gains and qualified dividends, are currently taxed at no more than 20%. However, if you’re a high-income taxpayer, proposed legislation could change that significantly. As we just mentioned, the package of proposed tax law changes includes an increase in the top tax rate to 39.6%, and this increase would also apply to investment income. That tax rate would be combined with the Net Investment Income Tax (NIIT), which would remain at its current rate of 3.8%. This results in a federal tax of 43.4% on qualified dividends and capital gains, and would impact those with a total income that exceeds:
- $459,750 for individual filers
- $517,200 for married couples filing jointly
- $488,500 for heads of household
- $258,600 for married couples filing separately
However, the higher tax rate would only apply to the extent that your taxable income exceeds applicable thresholds indexed for inflation after 2023. If approved, the change would also apply retroactively for dividends and capital gains received on or after the date the law was enacted.
Changes for Business Owners
Many of our clients are business owners, and there are several proposed tax law changes that could impact these individuals. They include:
- Increased tax rate for C corps – Proposed legislation would increase the tax rate for C corporations from 21% to 28%. This would be effective for tax years beginning after December 31, 2022.
- Limited ability to shift tax basis to family partners – If you have family partners in your business, you can currently use a partnership to shift the tax basis of your assets between you. A tax law change currently being proposed would greatly limit your ability to use this loophole.
- Limits for 1031 exchanges – If you’re selling one property and purchasing another one, you can utilize a 1030 exchange to defer the value of your gain and reduce your taxes. While this would still be a possibility under new legislation, the proposed change would limit the deferral to an aggregate amount of $500,000 per taxpayer per year (or $1 million for married couples filing jointly).
We understand that following proposed changes to tax laws can be difficult, but our team of experienced CPAs can help. We strive to stay aware of all proposed tax law changes, and will inform you of any approved changes that impact you or your business. If you have questions about any of the above proposed changes or how they would impact your individual tax situation if approved, we invite you to reach out to one of our CPAs today.