Preparing for Proposed Tax Changesby Michelle Bomberger | June 23, 2021
Tax changes can add an unwavering complexity, but proper timing and good advisors can keep you ahead of proposed tax changes.
Trying to do your own taxes is not a simple endeavor, and as a business owner, it’s even more complicated. You’re not only concerned with payroll taxes or income taxes; you’re also concerned about self-employment taxes and capital gains taxes. Most of us are familiar with these terms and their purpose, but we aren’t well-versed in structuring our financial worlds in a tax-efficient way. Part of the challenge is that the tax code is tens of thousands of pages long and has been changed an estimated 4,000 times over the past ten years. No wonder we can’t figure it out!
But tax is one area that you don’t simply ignore because you don’t understand it. Tax is an area to be actively managed. Currently, we see proposed or pending tax law changes in both Washington State and at the Federal level. As business owners, these taxes will impact you if they go into effect, and that’s where another challenge lies. Many of these proposed taxes are just that – proposed. So how do we plan for something that may or may not occur?
State Capital Gains Tax
Washington State just passed a new Capital Gains tax. It imposes a 7% tax on an individual’s Washington capital gains. On its surface, this law seems pretty clear cut; however, the details matter. The law has several important exceptions, including certain real estate, small business, and retirement accounts. Getting help from your professional team to understand how the law applies to your situation is essential because it’s complicated. The average individual will have difficulty sorting through it on their own. But wait, this law has already been challenged in court. So, should you invest the time and energy to plan around a law that will “likely” be thrown out? And if it’s not thrown out, is it too late to act?
Federal Capital Gains Tax
Another similar example is the new federal proposed capital gains tax. The federal proposal increases the long-term capital gains tax to 39.6% for those taxpayers with income greater than $1M. This tax rate applies to the appreciation of the value of assets held for more than one year, including homes. The tax is proposed and is not likely to pass in its current state. But wait, the Treasury document states that the law will be retroactive to the “date of announcement.” While that date is not clear, it suggests that there’s little one can do now to plan or work around its effects.
When to act on proposed tax changes?
When should you have acted? Many business owners assumed the new Democrat-controlled Legislative and Executive branches would make drastic tax changes and sold their businesses or real estate before the end of 2020 to avoid this dilemma. For many of us, that wasn’t a viable approach.
If you read up on these proposed taxes, you’ll find many examples of taxpayers who would not have thought they would be affected by simply reading the headlines. As they say, “The devil is in the details.” For this reason, you should stay abreast of tax trends and invest in valuable counsel – financial, tax, and legal – to ensure you understand what the impact would be if they take effect. You can then assess what actions you can take and when you should take them. If you can be ahead of the herd in talking with your advisors, you’ll get better advice and sooner, giving you the benefit of time and good advice in your decision making.
Legal Disclaimer: This article contains general information. Do not view this article as legal advice. Talk with counsel familiar with your unique business needs before taking or refraining from any action.