Brian Midwin, a managing partner with the CPA firm Midwin Vogel & Nathanson, spoke to the Palisades Rotary Club about possible changes in next year’s tax laws.
He said he’s still recovering from the “stampede” in April when the government created the Paycheck Protection Program. “The government said we have money to loan you and if you follow the rules, the loan will be forgiven.”
In order to qualify, a business needed a payroll and needed to spend the money on the payroll. “This money is taxable,” Midwin said, noting that the business/owner pays the tax, not the employees. “Even if the loan is forgiven, you still have to pay the tax. If it is not forgiven, you have to pay back the loan.”
He said that many businesses, such as the Lakers, had applied for the loan money, but then “gave it back.” There’s the possibility of a second round for the PPP, but “it would be targeted to businesses down in revenue by at least 50 percent.”
Midwin explained that the PPP rollout was poorly done and that after it was “completed,” there was still $100 billion left over that remains unspent despite the country’s economic pain.
Through the Economic Injury Disaster Loans (EIDL), small businesses and nonprofits could apply for a 30-year fixed loan at 3.75 percent, but there would be no forgiveness. “They capped the loan at $150,000, and some businesses are in danger of defaulting,” Midwin said.
Another result of Covid was that under the CARES Act, those who were older than 70 and 1/2 years old did not have to take their required minimum distributions (RMD) from IRA accounts this year. “Individuals could thus avoid payment of the income tax on the distribution if they do not need the cash flow,” Midwin said. On the other hand, he told the Rotarians, “If you will have income over $400,000 next year, you may want to take the RMD in 2020, when you are subject to lower income tax rates.”
It appears that under President Biden, tax rates may go up. The figures below are what Biden proposed during his campaign.
The top marginal rate on ordinary income is 37 percent until 2026, but Biden’s proposal is to restore the top marginal rate to 39.6 percent for taxpayers with more than $400,000 taxable income.
Currently, the tax-rate on long-term capital gains is 0 percent if income is below $78,750, 15 percent between $78,751 and $488,850, and 20 percent if income is above $488,850. Biden’s proposal would tax capital gains and dividends at 39.6 percent for taxpayers with over $1 million taxable income.
The tax rate on carried interest, if held for at least three years, is taxed at long-term capital gain rates. Under Biden, it would be taxed as ordinary income.
Estate taxes may also be reexamined. Currently the basic exclusion is $11.58 million and there is a 40- percent estate, gift and generation-skipping tax. (The 2017 Tax Cuts and Jobs Act (TCJA) had expanded the amount of assets an individual could pass to their heirs tax free.
Biden is suggesting that the TCJA be repealed. That would lower the estate tax exclusion to $5.49 million (adjusted for inflation) per individual. Also, the estate tax rate could be increased to 45%. This change could be retroactive to January 1, 2021.
He pointed out, “A person has paid taxes their whole life and now the government wants you to pay additional taxes on that person’s death.”
One additional Biden proposal would eliminate the step up in basis on assets when a person dies. “This is a big deal for Americans whose primary asset is their house,” Midwin said. “Their heirs, when they sell the house, could face a big taxable gain.”
Midwin, who urged people who have individual questions to see out their CPA, summed up his presentation: “Tax rates are going up.”