New Taxes Could Change Your Retirement
COVID-19 has impacted America’s finances significantly. To help weather the storm, the country has increased its debt load by 30 to 40 percent. At the same time, our tax rates are at 100-year lows. This unsustainable dynamic simply can’t last.
That’s why numerous tax changes are being considered, many of which target high-income households. Our financial planners have predicted which proposals could become a reality in the next decade. Consider those predictions here and how they might affect your retirement.
Social Security Taxes
One of America’s biggest financial problems is the projected shortfall of Social Security. Most Americans rely on this program to supplement their income after retirement, and it’s in serious need of some shoring up.
In 2020, employees and employers paid a combined 12.4 percent on all earned income up to $137,700. Any income earned above this amount is not subject to a Social Security tax.
Today, there’s talk of reinstating Social Security taxes for higher earners. This would involve being taxed at lower income levels and having taxes kick in again at a higher income, such as $400,000 or $500,000. Our financial planners believe this tax change is likely to occur soon.
Several deductions can no longer be written off, chief among them being unreimbursed employee expenses and real estate taxes and state income more than $10,000. These sorts of changes could lead to a system that offers a wide range of deductible expenses capped at 25 or 30 percent of your adjusted gross income. Our financial planners wouldn’t be surprised if this proposal was realized within the next decade.
Step-Up in Basis
A step-up in basis is the process of readjusting an appreciated asset’s value upon inheritance for tax purposes. The proposed change is to eliminate the step-up in basis, which would tax inherited assets based on the appreciated value, not the purchase price.
This potential change could affect taxpayers at all income levels. However, our financial planners think it has a low likelihood of going into effect because it has been discussed for decades without being implemented yet.
Other Tax Predictions
- Corporate income tax rates could creep up slightly, but they shouldn’t reach the level they were at prior to 2018.
- The highest marginal income tax rate is ripe for an increase. This would affect incomes above $600,000 for married couples filing jointly.
- The Section 199A qualified business income deduction might not change much. Since small businesses are still reeling from the required pandemic shutdowns, leaders are likely to avoid any detrimental tax changes.
- Changes to the capital gains tax for incomes above $1 million may take effect. This would tax long-term capital gains at 43.4 percent compared with 23.8 percent now. In other words, capital gains would be taxed as ordinary income.
If you have questions about how these proposed taxes could change your retirement, please contact Nelson Financial Planning. With over 30 years of experience, we know what financial plans work best over time.