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Proposed 2021 Capital Gains Tax Laws

The Biden Administration has proposed significant tax increases in various arenas in order to fund the American Families Plan. One of the strongest proposed tax increases affect capital gains taxes, which are taxes assessed on financial assets sold at a profit. Capital gains includes profit gained from stocks, but also includes real estate and business gains. To prepare for the best outcomes with your portfolios in 2021, there are three main areas to think about.

Aimed at Incomes Over $1 Million

Along with raising top marginal income tax rates from 37% to 39.6%, those $1 million+ earners would have the same increase from the current 20% to 39.6% on capital gains. After Net Investment Income Tax is added, including the Affordable Care Act additional 3.8%, capital gains tax could be as much as 43.4%, effectively doubling the current rate. Though the plan was released on May 28th, the proposal stipulates that these changes go retroactive to April 2021 to prevent people from selling off assets prior to the enactment.

Step-Up Basis for Inheritance in Jeopardy – Additional Risk for Estate Planning

Currently, heirs can protect their inheritance by reducing capital gains taxes by taking advantage of the IRS tax provision of Stepped-Up Cost Basis. In a nutshell, it’s considered a legal loophole, allowing investments to have reset value via sale or appraisal of inherited assets to be valued at the time of the original owner’s death. Thus, the current value of an asset when sold or appraised soon after would likely not change much, and therefore would not require a capital gains tax. Biden’s tax proposal eliminates this loophole and could completely change the nature and effectiveness of current estate plans.

Can Affect All Americans – Not Just Millionaires

There are a couple ways that the change in capital gains can even affect Americans who earn well below the $1 Million cap.

  • 401Ks – Most middle-class families have a 401K or other retirement investments. These changes in capital gains taxes could trigger a stock and general investment selloff that could, in turn, significantly affect retirement portfolios.
  • Small Businesses – If the business is tied in with an owner’s personal income, such as with solopreneurs, the sale of a business could result in an individual’s income raising over $1 million, triggering the new capital gains tax rates.
  • Inheritance – Even modest estates can easily add up to $1 million if passing a business or business-related assets and investments are part of the inheritance.
  • Selling a home – Home sales have been skyrocketing in recent times, after a huge down market. This means that even with the primary residence exemption rule, (living in the residence 2 of 5 years prior to the sale) a home’s sale could push the owner’s income over the threshold.

Managing the Changes to Protect Your Investments

There are ways to protect your investments and try to avoid the new tax increases. The goal is to reduce one’s income to below the $1 million threshold by donating assets, adding to trust funds, using installment plans to regulate income, transferring funds to tax-efficient assets and using strategic tax deferments.

Jorns & Associates stays on top of tax laws and financial trends so our clients can make informed decisions about their investment plans in real-time with current events.

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Status Update of Processing Form 941, Employer’s Quarterly Federal Tax Return and Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund

Recently, the IRS provided an update for returns and refunds that directly impact employers that have filed for the CARES Act Employee Retention Credit (ERC). Specifically, they addressed the status of processing Form 941, Employer’s Quarterly Federal Tax Return and Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

Like many businesses in the United States, the IRS has also been impacted by COVID-19 which has caused delays in their services. These delays have impacted the IRS processing mail, tax returns, payments, refunds, and correspondence. This has caused many businesses that filed for the ERC to experience a longer than anticipated tax refund.

Fortunately, the IRS states they are now opening mail within normal timeframes and have also made significant progress in processing 941 Forms. As of May 6, 2021, the IRS had about 200,000 941 Forms received prior to 2021 in the processing pipeline. Including current year returns, as of May 6, 2021, they had 1.9 million unprocessed 941s in the pipeline.

The IRS is rerouting tax returns and taxpayer correspondence from locations that are behind to locations where more staff is available. They are also taking other actions to minimize any delay in processing returns and refunds. Tax returns are being processed in the order they were received, and the IRS is working hard to get through the backlog.

As of May 7, 2021, IRS’s inventory of unprocessed Forms 941-X was approximately 100,000 which cannot be processed until the related 941s are processed. While not all of these returns involve a COVID Employee Retention Credit, the inventory is being worked at two sites (Cincinnati and Ogden) that have trained staff to work possible COVID credits.

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Biden Signs Stimulus Package into Law that Includes 6 Month Extension of CARES Act Employee Retention Credit Now up to $26,000 per Employee

Today President Biden signed the American Rescue Plan Act of 2021 stimulus bill into law. Among the many provisions within the legislation includes another six-month extension of the CARES Act Employee Retention Credit (ERC).

The legislation expands the ERC, a refundable payroll tax credit, to include wages for eligible employers from July 1, 2021 to December 31, 2021. In December 2020, the second relief stimulus extended the ERC to June 30, 2021 and expanded the credit to $7,000 per employee per quarter in 2021, among other provisions.

This extension now means eligible employers can receive up to $14,000 in additional credits per employee, or up to $26,000 in refundable tax credits per employee. Here is the breakdown:

  • Up to $5,000 per employee per year in 2020 (50% of wages up to $10,000)
  • Up to $7,000 per employee per quarter in 2021 (70% of wages up to $10,000)

In addition, the American Rescue Plan Act of 2021 includes two new categories and incentives for the third and fourth quarters of 2021:

  • Recovery Startup Business – Employers that began their business after February 15, 2020 and have annual gross receipts not exceeding $1 million. The credit for these employers is capped at $50,000 per quarter. Recovery startup businesses do not need to meet the government orders or gross receipts test to qualify.
  • Severely Financially Distressed Employers – Employers whose gross receipts for the quarter are less than 10 percent of their gross receipts for the equivalent quarter in 2019. An employer in this category with more than 500 employees can credit all wages paid and does not need to meet the “not providing services” requirement.

Jorns & Associates is prepared to assist you in determining eligibility, calculating, and monetizing the ERC. Our experienced team has developed a proprietary methodology, proven to be efficient and maximize your credits.