tax-accounting-services

May 10, 2021

In March, President Biden signed into law the American Families Plan. His hopes are to grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive. These ambitious spending plans will come at a cost of $1.8 trillion in new federal spending on education and family programs. Furthermore, in Biden’s eyes, the best way to fund these programs and tax perks, is by increasing taxes on the wealthy. Upon closer examination, these tax increases will have impacts far more reaching than the wealthy.

Draft tax bills were proposed in March. Floating out there now is the HR2286, the Sensible Taxation and Equity Promotion Act (STEP Act), the Ultra-Millionaire Tax Act and the For the 99.5% Act.

Key takeaways from these proposals are to:

Raise the top marginal income tax rate from 37 percent to 39.6 percent, which would apply to income over $452,700 for single and head of household filers and $509,300 for joint filers. However, these higher taxes could hurt the creation of new business and returns on private investment, which are a major source of funding for new drug discoveries and technology innovation.

Tax long-term capital gains as ordinary income for taxpayers with taxable income above $1 million, resulting in a top marginal rate of 43.4 percent when including the new top marginal rate of 39.6 percent and the 3.8 percent Net Investment Income Tax (NIIT). This could result in many Americans simply postponing the sale of stocks and other investments.

Tax unrealized gains at death for unrealized gains above $1 million ($2 million for joint filers, plus current law capital gains exclusion of $250,000/$500,000 for primary residences).

Elimination of a “stepped-up” basis when a person inherits a capital asset. This is where the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. Then, if the person who inherits the property sells it immediately, there won’t be any capital gains tax. Biden’s administration claims taxes on inherited family farms and small businesses won’t go up as long as heirs continue to run the farm or business. In reality, heirs may not want to continue to operate and are forced to sell to cover taxes.

Apply the 3.8 percent NIIT to active pass-through business with income above $400,000, end the preferred treatment of carried interest, and make permanent the 2017 tax law’s limitation on excess losses that applies to non-corporate income. Also, capping 1031 Like-Kind Exchanges at $500,000 in deferred capital gains. The majority of 1031 exchanges are done by those in sole proprietorships or S corporations. The proposed 1031 exchange limit would then trickle down to small businesses renting. Consequently, landlords will inevitably charge more rent to absorb the extra taxes.

Raise the corporate tax rate from 21% to 28%. This will be passed on to customers by raising prices and to workers by slowing wage growth.

$80 billion over a decade to beef up the Internal Revenue Service (IRS) to increase tax compliance and collections.

Tax Foundation General Equilibrium models suggest that the American Families Plan Tax Provisions will reduce Gross Domestic Product, Gross National Product, Capital Stock, the Wage Rate and Full-Time Equivalent Jobs.

Gross Domestic Product is the product of Labor force growth + Productivity. According to the Census Bureau, U.S. population growth is the lowest since 1930’s. And, we now have the lowest birthrate since 1979. All that leaves us with is our ability to increase the output per worker (productivity).

The proposals have a long way to go before becoming law, but it is important to begin the planning process and to be aware of the far-reaching ramifications if enacted. The cost of these taxes will certainly extend beyond the wealthy.

Jenifer Pento, CPA

Tax and Accounting Advisor

Pento Portfolio Strategies

www.pentoport.com

jpento@pentoport.com

O (732) 772-9500

C (732) 207-6090

F (732) 275-8232

The term “exit tax” has generated much confusion among New Jersey residents selling their homes to move out of the state. While it is often thought that this is a tax imposed when you sell property in New Jersey and change your domicile, this is an invalid statement. It is not an additional tax, but merely a pre-payment of potential income tax due from the sale of the home.

P.L. 2004, Chapter 55 became effective August 1, 2004 and was enacted to ensure that the state would collect income tax from nonresident sellers on the resulting gains from sales of property. This tax payment is collected at closing and is a required condition to recording the deed.

Form GIT/REP-3 is used by resident taxpayers — and by nonresident taxpayers claiming one of the recognized exemptions — to claim an exemption from withholding at the time of sale. The form contains 14 exemption choices, called “Seller’s Assurances.” The first exemption is for resident taxpayers who will be paying the tax on their Resident NJ 1040 Gross Income Tax return. Exemptions 2 through 14 can be used by residents or nonresidents.

Form GIT/REP-1 or GIT/REP-2 is used by nonresident taxpayers with no qualifying exemptions.

The estimated Gross Income Tax due is calculated by multiplying the gain on sale or transfer by the highest rate of tax (10.75%) or 2% of the sales price, whichever is higher. The pre-payment is recorded on the taxpayer’s NJ Nonresident Return and treated as a prepayment of tax. If there is an overpayment of tax (due to, e.g., there not being a taxable gain on the sale of the residence) the “exit tax” transforms to the “exit refund” whereby the

overpayment will be refunded.

The seller is considered a nonresident unless a new residence has been established in New Jersey. Part-year residents are considered nonresidents.

Observation: Bear in mind that for federal income tax purposes, homeowners may be able to exclude the gain on the disposition of a home from income under IRC Sec. 121, which states that the taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain

married taxpayers). Generally, this exclusion can only be claimed once every two years. A reduced exclusion is available to anyone who does not meet these requirements because of a change in place of employment, health or certain unforeseen circumstances. Unlike under former law, the gain on the sale of a house is now permanently excluded, rather than deferred, and a taxpayer doesn’t have to purchase a replacement home to exclude the gain. New Jersey follows federal tax law and if there is any amount taxable for federal purposes, it

will also be taxable for New Jersey purposes.

The New Jersey “Exit Tax” can be misleading, but still needs to be taken into consideration if you plan on selling your home and leaving the state. Additionally, New Jersey imposes a Realty Transfer Fee and both New Jersey and New York enforce the mansion tax, which I’ll address in an upcoming blog. An understanding of what is required at closing and knowing the financial impact will avoid surprises at tax time.

Biden’s Tax Increases Won’t Just Impact the Rich

New Jersey “Exit Tax” – The Truth Behind the Confusion