U.S Government Covid aid to individuals and businesses is expected to raise the nation’s debt to about $28 trillion. For high- earning and high-net worth individuals now is your last chance to act before higher taxes are expected to be enacted in 2021. Here’s what you need to know:
The $6 trillion in Covid aid and stimulus adds to the $22 trillion federal debt outstanding, incurred to pay for Social Security, Medicare, Medicaid, and other programs, and years of widening annual federal budget deficits. The nation’s debt is about equal to current annual gross domestic product (GDP) but expected to swell to 127% of GDP, according to the Committee For A Responsible Federal Budget, a bipartisan think tank.
The U.S. has a low tax burden relative to other major world economies and it is the world’s largest developed economy. It possesses the financial strength to pay the suddenly larger-than-expected debt due to the Covid crisis. However, fiscal reality means taxes are going to rise in 2021.
With the U.S. approaching a major shift in fiscal and tax policy, high-income earners and high-net worth individuals are all but certain to be targets for tax hikes in 2021. Acting now – before the shift in tax policy is enacted into law – could result in significant tax savings in 2021 and subsequent years.
Precisely which taxes will rise and by how much is yet to be decided. Some of the tax hikes will be retroactive to the beginning of 2021 and although no amount of planning will change that, professional tax planning advice could nonetheless result in significant tax savings for high-income and high net worth individuals.
President Biden campaigned on a plan for increasing the payroll tax on select employees by adding a new 12.4% tax on those with wages of more than $400,000. Also planned is a hike in the top income tax rate, from the current 37% rate to 39.6%. Doctors, dentists, senior managers, business owners and other high-earning professionals will be affected if these tax two income tax hikes are enacted.
Meanwhile, the exemption from estate tax of $11.7 million -- $23.4 million for a married couple -- is almost certain to be slashed to $3.5 million -- $7 million for a couple, under Mr. Biden’s tax plan. If this change is enacted, the estate tax will be expanded to hit millions of families.
In addition to targeting high income earning and high net worth individuals, tax compliance by the IRS is expected to toughen. It’s a way the Government can raise taxes without going to Congress.
You may not be able to avoid higher taxes under the new tax rules expected to be enacted. Tax planning is highly personal because everyone’s timing, assets, income, and family situation is unique, and the precise law changes are not yet known. But enough is known about what’s ahead to recommend being proactive about tax planning right now.
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