With Higher Taxes Possible, Here’s What to Do Now
Some tax problems will arise later this year. One of these concerns people who own businesses and pay self-employment tax. They pay 12.4 percent of their income in social security taxes and 2.8 percent for Medicare, but only for the first $ 142,800. This cap could be lifted so that all income is subject to self-employment tax.
One strategy is for owners to convert their business from a limited liability company to an S sub-chapter company, which could lower the tax on self-employment, said Edward Reitmeyer, partner in tax and corporate services at Marcum, an accounting firm.
But it has to be done carefully. What an S-Gesellschaft pays in distributions from the company’s income is exempt from self-employment tax. However, the owner of the S corporation cannot simply make distributions to himself. he must receive some compensation, which is subject to self-employment tax.
“The IRS will come after you if your compensation is too low,” said Mr. Reitmeyer. “But with this structure you are at least prepared to change the unlimited income tax on income.”
Economy & Economy
Jan. 22, 2021, 7:23 p.m. ET
Perhaps the biggest concern for this year is what will happen to the capital gains tax rate, which is currently 20 percent. Most wealth advisors will bet on an increase, probably at the same level as income tax. That’s not such a jump for most earners, but for someone in the top tax bracket, 37 percent.
How much tax you pay on the appreciation of your stock holdings is one of the few taxes that you can control because it is up to you when selling stocks. However, you need to calculate whether it makes more sense to sell stocks that have appreciated particularly after the 2020 ramp-up and pay the tax now or hold on to them.
Several factors play a role here. If the strategy is to hold these securities until your death and not pay capital gains tax, this tax break could come to an end, as my column pointed out last week. The Biden government could repeal the rule that fixes the value of assets in an estate at the time of the owner’s death and wipes out years of capital gains. The administration could instead require that heirs pay tax on those profits when they sell the property.