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NOVEMBER 29, 2022


Written by Joshua R. Sherrard, President & CEO of Strategic Navigators, Inc.

Traveling around the country and interacting with entrepreneurs of every stripe, the overwhelming consensus is that taxes will need to increase. Given everything that’s happened in our country and around the world in the past year and a half, there is no doubt in my mind that taxes in America are going to get more complex and burdensome for people in higher income brackets.

According to the Tax Foundation, those making $145,000 or more per year (based on adjusted gross income) are in the top 10% of earners in the U.S., and pay approximately 70% of federal income taxes. Those making roughly $515,000 or more per year are in the top 1%, and account for 38.5% of income taxes paid.

As the title of this article suggests, many believe a tax storm is coming. In light of the recent news from the current administration's proposed Infrastructure and Jobs Act,1 funding for which is expected to come largely from tax increases, business owners and high-income earners find themselves looking for strategies to save on taxes. Although the details are still being ironed out, proposed tax changes include:

  • Increasing the top federal tax bracket to 6%.

  • Changing corporate taxes from 21% to 28%.

  • Reducing the estate tax minimum from $11.7 million to $3.5 million per person

  • Adjusting capital gains tax and removing basis.

  • Change in taxation on employees for social security – moving the ceiling on social security tax for those making over $400,0002 Note self-employed individuals would pay double the SS tax under the proposed plan.

When combined with state taxes and payroll taxes, without exception, those in the highest bracket will be paying more on their last dollar than they keep. The architects of this plan have said they don’t intend to raise taxes on those making less than $400,000. Economist Arthur Laffer addresses the impact raising taxes on the rich for the entire economy.3 No one will be spared in this storm. 

Historically the wealthy in this country have found ways to keep their taxes down by using the full breath of the tax code. John Stossel has a fascinating video detailing this history.4 Anyone with the luxury of controlling their assets, income, location, and spending, will avail themselves of various strategies to save on taxes. If these families don’t use these strategies, their wealth will cease to exist. For the average entrepreneur some of the only options available at the end of the year are writing off new vehicles or equipment, under Section 179, or painfully paying tax on the profit that remains in the business as retained earnings. This is because most entrepreneurs and their tax preparers are doing post-mortem tax preparation at the end of the year verses advanced tax planning by looking ahead. Just like the wealthiest families of our country have discovered, there are numerous strategies found in the 85,000 pages of the tax code, cases, regs and statutes that can be implemented ahead of time to impact savings. In my experience, most entrepreneurs and their advisors, have either done nothing or very little in the way of tax planning. Rather than looking ahead through the windshield and planning accordingly (Tax Planning), they spend their energy reacting to any and all tax implications by looking through the rearview mirror (Tax Preparation).

One of the more concerning parts of the new administration’s tax plans is the proposal to change the way capital gains taxes are treated. They’ve proposed increasing capital gains tax to 39.6% on income over $1 million. Another part of the plan includes eliminating step-up in basis. This aspect of the coming storm has the potential to shatter many dreams of selling a business, leaving an inheritance or transferring wealth. Once again, it’s time to batten down the hatches and prepare for the storm.

There are hopeful solutions under current laws. These include advanced tax planning with tax attorneys and CPAs who are on the cutting edge of strategies that have been a part of the tax code for decades. Other solutions include utilizing tax-free vehicles such as the “rich person Roth”  or finding credible ways to maximize business transfers and asset protection.  Some tax planning measures may include using additional corporate structures, tax-free benefits, varied local tax rates, or asset protection vehicles.

I encourage all of you readers, entrepreneurs and employees alike, to consider these tax proposals, take inventory of where you are at and make the preparations needed to save on your taxes regardless of what changes may come.

Josh’s extensive background in Business, Finance, Executive Management, Real Estate, Operations and sales, bring a unique depth to his Business Family Coaching strategies.

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