Understanding the Proposed Tax Changes
In a strategic move that may be more about politics than policy, Senator Warren has reintroduced her “Ultra-Millionaires” wealth tax proposal. This comes on the heels of the Administration’s Fiscal Year 2025 Budget, which also suggests a wealth tax. With the White House and both Chambers of Congress in play, the political landscape is ripe for discussions on tax reform.
Business owners and their advisors are encouraged to pay close attention to these developments. Despite the low likelihood of immediate enactment, the proposals signal potential shifts in tax policy that could have significant implications for business planning.
The Administration’s proposed changes to federal income tax are extensive. For individuals, the marginal income tax rate could increase from 37 percent to 39.6 percent, with a lower threshold for the top rate. S corporation shareholders and partners in tax partnerships could see their business income taxed at this higher rate.
Long-term capital gains could also be taxed as ordinary income for high earners, and the Net Investment Income Tax (NIIT) rate might rise from 3.8 percent to 5 percent for those with incomes over $400,000. Additionally, the Medicare tax on high earners could see a similar increase.
Corporate tax rates are not spared from the proposed hikes. C corporations could face a jump from a flat 21 percent to 28 percent, affecting reinvestment capabilities and making asset sales more costly. S corporations with built-in gains or excess net passive income would also be subject to this increased rate.
Compensation deductions for closely held C corporations could be capped at $1 million per employee, potentially complicating incentive arrangements. Losses on liquidations within controlled groups may be denied, and like-kind exchange deferrals could be limited to $500,000 per individual annually.
The backdrop to these proposals is a national deficit nearing $35 trillion, with interest payments on the debt ballooning. The economic and geopolitical implications are profound, raising questions about the balance between taxation and spending.
While some argue that increased taxes could dampen economic enthusiasm, others see them as necessary for addressing the deficit. The debate continues as businesses and taxpayers brace for potential changes that could reshape the financial landscape.
