Patrick Horning is a senior director of Advanced Planning at Northwestern Mutual.
While much is still uncertain, as a business owner you’re likely wondering how potential tax law changes that are being considered in Washington may affect you and your business. Unfortunately, the political uncertainty and evolving legislative text has made planning for these possible changes difficult. Since this is ongoing, we don’t know what items will be contained in final legislation, if any. Despite the uncertainty, now is the time to talk to your financial, legal, and tax advisors, while there still might be time to take proactive measures.
These are some of the key potential tax law changes that may impact business owners.
Corporate Tax Rate
The corporate tax rate would increase from 21 percent to as high as 26.5 percent. This applies to C Corporations and not flow-through entities such as S Corporations and Partnerships since they are taxed at the business owner’s personal rate.
Qualified Business Income Deduction
The maximum allowable deduction under the Qualified Business Income Deduction (officially the Tax Cuts and Jobs Act, Provision 11011, Section 199A) would be set at $500,000 (married, filing jointly) and $400,000 (single).
Net Investment Income Tax
One proposal that would mainly affect high earners with significant investment income focuses on the net investment income (NII) tax, which is a surtax on a portion of modified adjusted gross income (MAGI) over certain thresholds. The change would expand the application of this 3.8 percent tax rate to include net income that is derived in the ordinary course of business above $500,000 (married, filing jointly) and $400,000 (single).
Individual Income Tax Rates
Perhaps one of the most talked about proposals is an increase in the top marginal income tax rate to 39.6 percent. The increased rate would apply to taxpayers with taxable income of more than $450,000 (married, filing jointly) or $400,000 (single).
Capital Gains Tax Rates
The top capital gains rate would increase from 20 percent to 25 percent for those earning more than $450,000 (married, filing jointly) or $400,000 (single). This would be effective for tax years ending after the date of introduction (September 13, 2021); however, a transition rule would keep it at 20 percent for gains recognized earlier in 2021.
Higher Income Surtax
A new 3 percent surtax on taxpayers with a MAGI of more than $5 million ($2.5 million for married filing separately and $100,000 for trusts and estates) would be imposed.
Individual Retirement Account Reform
Both a House of Representatives bill and a separate Senate document would put limits on IRAs that reach a certain amount ($5 million based on the Senate language and $10 million in the House). The House bill would prohibit what’s often referred to as the “backdoor Roth” in which a non-deductible IRA is converted to a Roth IRA. This change would be effective in 2022. In addition, the House bill would eliminate all Roth conversions starting in 2032 for taxpayers who make more than $450,000 (for married, filing jointly) or $400,000 (for single filers).
Many businesses without employer-sponsored retirement plans would be required to auto-enroll employees in Individual Retirement Accounts (IRAs) or qualified plans. The requirement would apply to employers with five or more employees, which have been in business for at least two years.
Talk to Your Advisors About How Potential Tax Law Changes May Impact You
Current law looks to be changing. Talk to your financial, legal, and tax advisors about whether any potential changes impact you, and what actions you can take now. Waiting until legislation is passed may be too late.
This publication is not intended as legal or tax advice. This information is intended solely for the information and education of Northwestern Mutual financial representatives, their customers, and the legal and tax advisors with whom they work. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.
As an attorney in Sophisticated Planning Strategies, I work with Northwestern Mutual financial advisors as they help clients achieve financial security.