Why are tax bills increasing for 2021? And why worry about it now when most people are focused on are preparing tax returns for 2020? At InventWealth, we care for the present, of course, but we also obsess about the future. How else can we help you create plans to match your goals?
You might have already anticipated that your tax bills for 2021will be increasing. There are a lot of reasons, but most can be traced to the changes new President Joe Biden has made in the tax code. Tax Bills can increase, both for you as an individual, and your practice as a company. Of course, the first and most obvious way this happens is that the government has changed the brackets. Let us compare 2020’s brackets with the 2021 brackets on the two charts below:
Tax Bills: Doctors and Entrepreneurs, You’re “It” in Pres. Biden’s Game of Tax Tag
We will explain the title above, but we will go back to basics first. Take a look at the tax brackets or “marginal tax rates” for 2020. By the way, It is time to get started on those taxes, if you have not yet done so. Thus, the brackets listed below refer to the tax returns you are filing now. What Are the 2020-2021 Federal Tax Brackets and Tax Rates?
Bracket for Single Filers in 2020
37%: Above $518,400
Bracket for Married Couples filing Jointly in 2020
37%: Above $622,050
2021 Tax Bracket Thresholds and Marginal Rates
Now, check out your coming 2021 marginal tax rates and each bracket’s corresponding taxable income range. These are the figures you must consider when filing your tax returns in 2022. They will cover the earned income of 2021.
- 10%: $0-$9,950
- 12%: $9,950-$40,525
- 22%: $40,525-$86,375
- 24%: $86,375-$164,925
- 32%: $164,925-$209,425
- 35%: $209,425-$523,600
- 37%: Greater than $523,600
2021 Tax Bracket Thresholds and Marginal Rates For Married Couples Filing Jointly
- 10%: $0-$19,900
- 12%: $19,900-$81,050
- 22%: $81,050-$172,750
- 24%: $172,750-$329,850
- 32%: $329,850-$418,850
- 35%: $418,850-$628,300
- 37%: Greater than $628,301
Tax Bills: The Take Aways from these Figures:
- As you might already know, the government’s way of compensating for inflation is to change rates each year. The enigma is these changes can happen although the actual laws do not change.
- As you can see by the tables above, tax bracket thresholds for 2021 increased by about 1% over 2020 levels.
- And now, about Biden’s tax tag game we mentioned above. Obviously, the Biden administration is focusing on wealthier Americans.
- On the one hand, yes, you will feel tagged as “it” in Biden’s tax tag game, if you make $400,000 per year.
- On the other hand, doctors and entrepreneurs who are not quite near that amount will also see their tax bills increase. In fact, we expect you will see the tax bills grow in proportion to the swelling of government spending.
Thus, it seems appropriate to summarize some of the ways your taxes might increase during the Biden administration. Sadly, you might have to avoid adding those much-needed new staff members or buying that new essential medical equipment.
Below you will find five answers to the question we posed in the title of this blog article: Why Are Tax Bills Increasing in 2021? And we already started Answer Number One by unlocking the sub-topic of changing tax brackets with our opening statistics.
Good Reason 1. The Tip of the Iceberg: Changing Tax Brackets And Your Tax Bills
You will undoubtedly notice that the top tax bracket has reverted to “where it was before the Tax Cuts and Jobs Act was enacted in 2018.” Pundits are pointing out that the “current 37% tax bracket will rise to 39.6%. This change will only affect those earning $400,000 or more. All other tax brackets will remain the same. On a theoretical $500,000 income, this would raise the tax on the incremental $100,000 to $39,600 from $37,000.”
Bad Reason 2: Increasing Capital Gains and Tax bills
Under the TCJA tax law, we were very proud of the capital gains structure. You see, it empowered those of us holding capital assets longer than a year to gain lower tax rates on gains initiated by sales.
As you might already know, Most of us only garner 15% in long-term capital gains rates. “Those with a taxable income of $80,000 or less may pay as little as 0% in tax on long-term capital gains.” However, you’re “it” in the tax tag game if you earn a smidge more than $441,450. For example, according to experts as GoBank and Aol Finance, if you and your spouse, as joint filers, earn $496,600, then your capital gains tax bills inflate to 20 %.
The New Administration’s Tax Code Game of Tag
President Biden’s new tax code game of tag, if you make $1 million, you will be forbidden to receive the long-term capital gains tax rates. Therefore, high earners must pay regular levels of income tax on long-term capital gains. Are you tagged as It in Biden’s tax code game? Although you are a high earner, how will you offset the disadvantage of higher tax bills? You might never know if you do not take advantage of Invent Wealth’s Tax Review service.
Doctors and savvy entrepreneurs know that “Paying less in taxes is only part of the story“ of maintaining your fiscal health. And we do not consider paying less in tax bills to be the only avenue of success in attaining your best lifestyle. That’s a different blog topic.)
Ugly Reason 3: A Good Thing Comes to an End–Say Farewell to the Qualified Business Deduction
Some business owners will have to say good-bye to the 20% qualified business deduction, A gift of the TCJA tax law. The Qualified Business Deduction immensely helped tax-payers who owned businesses. It stipulated businesses could subtract “an additional 20% off their income when calculating their taxable income.” The Biden administration did not completely destroy this deduction. However, if you earn over $400,000, you’re “it.” Quite simply, businesses that create more than $400,000 will be getting bigger tax bills.
Wealthy Reason 4: The Step-Up Plan–It Will Be Gone But Not the Tax Bills
Biden has eliminated the Step-Up Plan. And the consequences of that elimination could hurt both low- and middle-income taxpayers. To clarify, the current Step-up plan helps a taxpayer who inherits the property. This tax rule steps up the value of the inherited property, to the current market value at the time of the owner’s death. Most importantly, this policy has saved many heirs from capital gains liabilities. Watch out! You see, under the Biden tax proposal, this step-up tax policy disappears.
“As an example, imagine that you inherit a $500,000 piece of property that cost your parents $300,000. Under current tax law, your stepped-up cost basis in that property would be $500,000.” Thus you wouldn’t owe any tax if you immediately sold that inherited property.” When we lose the step-up policy, your tax bills will sky-rocket if you inherit property. If you have not done the math, we want you to understand that your tax bill would include capital gains tax on $200,000.
Shocking Reason 5: Social Security Payroll Tax Bills Increase
Another notable way the Biden administration could increase your tax bills is by raising the Social Security payroll tax. Again, the magic number is $400,000 per year. If you make that amount, the government might impose the entirety of the usual 12.4% Social Security payroll taxes.
This would be a significant change from today’s rules. By contrast, at the present time, the social security tax is evenly split in half by employers and employees. Additionally, it only refers to incomes of up to $137,700. We can almost foresee a Social Security tax gap. You see, those who earn between $137,700 and $400,000 would not pay any extra taxes.
Special InventWealth Note:
Watch out for increasing social security payroll taxes, doctors. Taken in tandem with the much-touted minimum wage idea, this could hurt a lot of small practices and clinics. And we know these policies could destroy a start-up before it gets a good beginning. Can all these new tax bill policies really bloat your 2021 tax bills? We will see. And we will let you know.
Now, we invite you to check out this blog on Thursday to see even more ways your tax bills will increase for 2021. Likewise, we take this opportunity to invite you to see how InventWealth can help you prepare now. We create personalized tax and wealth-building strategies. You have heard of preventable health crisis care. Likewise, we are specialists in preventable wealth crisis care.