A common theme of recent tax legislation has been to place most, if not all, of the burden of new taxes on “wealthy” individuals. In so doing, Congress has defined the wealthy as those with an income above a certain threshold.
Unfortunately, Congress has chosen multiple different income levels. For example, a married couple filing a joint return is wealthy if:
- Taxable income exceeds $450,000 for purposes of the 39.6 percent tax rate.
- Adjusted gross income exceeds $300,000 for purposes of the phaseout of the exemption deduction and certain itemized deductions.
- Adjusted gross income exceeds $250,000 for purposes of the new healthcare taxes on earned income and net investment income.
Taxpayers should expect a significant element of future tax planning to include trying to manage their annual income to stay below the various thresholds. To do so, they will want to avoid income spikes – such as large one-time gains on the sale of a business or another investment, a large one-time bonus from their employer, or election of a lump-sum payout if they win the lottery.
Techniques like installment sales in the case of gains, deferred compensation arrangements for bonuses and annuitizing lottery winnings may prove advantageous in some cases. And, since the top tax rate on conventional C corporations remains at 35 percent, which is now lower than the top rate that applies to individuals, it may make sense to consider this entity structure for current or future businesses.
Now is an excellent time to visit with your tax adviser, who can help you plan to minimize these tax increases and take maximum advantage of the extended tax breaks.
Future Tax Legislation
The new legislation does not come close to solving the budget issues that Congress faces. Expect the debate to continue about future spending cuts and revenue enhancements.