Americans pay their taxes every year, and when the finally think they understand how it works, the IRS changes the rules for next year.
As President Joe Biden changes things in the American Families Plan, Americans should prepare again for changes in rules.
“There is still time for plenty of wrangling in Washington over the final plan, so the ultimate tax implications are hard to predict,” says Rob Cordasco, author of A Framework for Growth: Smart Financial and Tax Planning Strategies Throughout the Entrepreneurial Life Cycle.
Due to the even split of Democrats and Republicans, it makes it harder to predict what might happen as a result.
Cordasco has highlighted specific areas that people may want to watch as things continue to change.
The top income tax rate should be watched; Biden’s plan, if enacted, will increase the top tax rate to 39.6% from 37%.
Cordasco suggests professionals switch from a traditional IRA to a Roth IRA to accelerate income for 2021 and defer expenses into 2022.
He also suggests that people pay attention to special capital gain rates. If Biden’s changes go through, gains and dividends would be taxed as ordinary income and subject to the 39.6% top rate.
Finally, it’s important for people to watch for partial elimination of step up in basis.
This is important for people gaining an inheritance, because normally they step into the money, not needing to pay the taxes the original owner would. Biden’s plan would eliminate that loophole.
“Taxpayers need to make sure they and their tax advisors are up-to-date on the rules to make sure to maximize the opportunities under the law,” Cordasco says.
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