So how do you define who is wealthy?
The latest tax reforms proposed by the House Ways and Means Committee basically state that wealthy individuals are people with an annual income of $ 400,000 or couples with an annual income of $ 450,000.
“Rich is a term used to describe people who have more than us when we don’t think it deserves,” said Brad Klontz, a financial psychologist in Boulder, Colorado. It states. “$ 400,000 is an arbitrary number. You may be” rich “in Central America, but you may be in the middle class on the coast. “
Four years ago, when the final changes to the Internal Revenue Code were made, tax rate cuts were made for businesses and ultra-rich individuals, especially those who own real estate and can benefit from a very specific tax deferral strategy. The emphasis was on. To the property.
This time, businesses don’t pay significantly higher taxes, at least not as high as some progressives wanted. Instead, tax law focuses on increasing income from the wealthy.
“All of this law is focused on the individual and raises expectations for the wealthy,” said Michael Kosnitzky, a partner at law firm Pillsbury Winthrop Shaw Pittman. “Corporate tax is paid by shareholders with low dividends, employees with low salaries, and consumers who pay for goods and services, so raising the corporate tax rate does not make us wealthy. These proposals are taxed by personal income tax. . “
The proposed maximum income tax rate of 39.6% looks like the previous maximum tax rate of 39.6% in 2017. This is slightly lower than the 2017 income level, with an individual income of $ 400,000 and a couple income of $ 450,000. The highest income tax rate is 37%, starting at $ 523,600 for individuals and $ 628,300 for couples.
However, because the deductions are lower than the tax law before the change in 2017, people affected by the new tax rate will also pay more.
Pamulkina, Chief Fiduciary Officer of Financial Services Company Northern Trust and Head of Trust and Advisory Services, said: “The 39.6 percent tax rate is a much higher tax rate because the deductions are much smaller.”
Many people were affected by the loss of state and local taxes, or the full deduction of SALT. The 2017 change limited the deduction to $ 10,000, affecting people living in Democratic-controlled states on the northeast and west coast, where state income and property taxes are high.
Limiting it has brought more money to the US Treasury. In 2017, with unlimited deductions, the federal government paid an estimated $ 122.5 billion. The cap reduced that number to $ 24.4 billion the following year.
Details of the tax bill are still under negotiation, and lawmakers representing the affected states said they hoped to be able to revive more of the SALT deductions. One proposal doubles the deduction to $ 20,000 and does not return to its previous state on a large scale.
The tax that defined this year’s debate was capital gains. The bill proposal — raising the rate from 20 percent to 25 percent for those who earn more than $ 400,000 — has come as a bailout for two sets of taxpayers: may inherit property with very wealthy people. No one.
The Biden administration began a year of discussions on raising the capital gains rate to the normal income tax rate for high-income earners and banning provisions that would allow property inheritance without capital gains.
The government’s original proposal was to increase the maximum capital gains rate to 43.4% (upper income tax rate plus 3.8% tax on investment income paid to Obamacare) for people with incomes in excess of $ 1 million. Was talking about. However, most attention was directed to President Biden’s proposal to end the so-called step-up on the basis of death. This eliminates all taxable profits on the assets passed to the heirs. Abolishing it will add $ 11 billion in annual tax revenue.
After that, the proposal was withdrawn.
“Basically, losing a step up is a big win for a wealthy family,” said Edward Renn, a partner in the law firm Withersworldwide’s personal clients and tax groups.
But that change was not made to save the wealthy family. This change was made because it could hurt the family in a more modest way that had the assets to give to the children.
“This provision benefits the very wealthy people who have built their businesses,” said Justin Miller, National Director of Wealth Planning at Evercore Wealth Management. “But there are benefits to those who inherit hundreds of thousands of dollars from their parents or grandparents who may be subject to capital gains tax. Many people, not just the top 1% and top 0.1%. Would have influenced. It wouldn’t have been a popular strategy. “
Taxes that affect real estate and big gifts have long been ripe for tax changes. One change would bring the inheritance tax exemption back to the Obama administration level. However, it is unlikely to increase revenue from megamillionaires or billionaires. The proposed tax exemption will drop from $ 11.7 million to about $ 6 million per person, but the inheritance tax rate remains at 40 percent. That’s important for the largest real estate.
“If you want to prevent the dynasty, the highest rate of inheritance tax is paramount,” said Harland Levinson, a certified accountant in Beverly Hills, California. It is the maximum tax rate that affects the largest real estate. “
However, many other proposals aim to crack down on areas that have allowed the wealthiest and most sophisticated Americans to pass considerable wealth to heirs tax-free. One is to block access to various types of grantor trusts that offer ultra-high net worth individuals the opportunity to transfer vast wealth.
The popular type allows someone to put assets such as private sector stocks that are about to go public into a short-term grantor trust and pass all gratitude to the heir tax-free. Alternatively, you can use another type of grantor trust to pay all taxes on your investment in the trust and grow that investment tax exempt.
“Granter Trust was the basis of real estate planning,” Miller said. “This proposal threatens to eliminate the trust of the grantor on the day the bill is passed.”
The tax bill also seeks loopholes in favor of the highest-income earners in certain industries, such as abolishing the carry-over tax incentives used by high-income earners in the private-equity world.
Another proposal aims to reduce the stock incentives received by start-up founders and early employees, known as SME Eligible Stock Limits.
Currently, the first $ 10 million of these shares when the company goes public can be exempt from tax. This proposal will reduce that $ 10 million to $ 5 million.
It helps reduce the impact when people find ways to get deductions multiple times.
Tara Thompson Popernik, Research Director, Wealth Strategy Group, Bernstein Private Wealth Management, said: “They can fund multiple trusts. The amount that can be excluded is almost eliminated. 50% is still a significant benefit.”
And for those who missed, those who earn more than $ 5 million a year have an additional 3% tax, and their personal severance account cap is set at $ 10 million (this is Silicon’s). In response to ProPublica’s article revealing Peter Thiel, Valley investors were tax exempt …