BDO USA has published an article, “How to Realize Tax Savings When Tax Rates Increase”, published on BDO USA. The abstract is as follows:
The Treasury Department’s Green Book outlines proposals supported by the Biden Administration that would increase federal tax rates for corporations and high-income individuals, generally effective for taxable years beginning after December 31, 2021. Under these proposals:
The corporate tax rate would increase from 21% to 28%; The effective tax rate on global intangible low-taxed income (GILTI) would increase from 10.5% to 21%; The top marginal ordinary income tax rate for individuals would increase from 37% to 39.6%; and The tax rate on long-term capital gains of individuals would increase from 20% to 39.6% (43.4% including the net investment income tax) for taxpayers with adjusted gross income exceeding $1 million ($500,000 for married individuals filing separately), indexed for inflation.
Note that the increased tax rate on long-term capital gains is currently proposed to apply retroactively to gains recognized after April 28, 2021. For more information on planning for capital gains, see BDO’s article Key Tax Strategies to Consider for Capital Gains.
If the Administration’s proposed rate increases are enacted, the timing of income recognition and deductions becomes critical for taxpayers that want to minimize their tax liabilities for 2021 and subsequent years. The general strategy when tax rates go up is to accelerate income recognition so that income is taxed at the existing lower rate, and to defer deductions so that they generate future tax benefits at the higher rate. With proper planning, this strategy can result in permanent tax and cash savings over time.
Click here to read BDO USA’s summary of “How to Realize Tax Savings When Tax Rates Increase”.
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.