President Biden’s Proposed Changes to the TCJA
Just joining us? What you’ll find back in part one: my answer to a query from Patrick. While I’d characterize him as an easily irritated fellow and a remarkably self-enamored author, I admire someone who churns out best-sellers.
Another of Patrick’s less admirable traits: He just has to impress people. For instance, Patrick will go on interminably about how he expects to be the recipient in 2021 of a seven-figure-check for the sale of his personal papers. With good reason, says Patrick, because, as explained in more detail in part one, his voluminous cache includes original manuscripts and historic exchanges of correspondence with boldface names and A-listers.
What awaits you back in part two: a discussion of the seven brackets for ordinary income from sources like salaries and other kinds of compensation that top out at 37 percent for 2021; and “indexing” of the brackets.
What you’re about to read in part three: a discussion of: “taxable income”” and why it’s a no-brainer that Patrick will be hit with the top rate of 37 percent. It’ll explain how an affluent author like Patrick could be adversely affected in the event President Biden overcomes opposition in the Senate–– by probably all of the fifty Republicans and perhaps even some of the fifty Democrats––and prevails on his proposal to return the top rate of 37 percent to the 39.6 percent that it was before Congress approved and then-president Trump signed the Tax Cuts and Job Act.
Taxable income. The brackets apply to “taxable income” (line 15 of the 1040 for calendar year 2020).
The term is IRS lingo for the amount that’s left after wages and other kinds of reportable income are offset by the Schedule A write-offs or standard deduction amounts (discussed in part two), along with all other allowable deductions, and before any credits are claimed.
The 37 percent bracket. Patrick, suppose 2021 is when you receive an amount noticeably north of one million dollars from the sale of your personal papers (with some subtractions for things like your agent’s fee and your expenditures for research and translation).
You’ll be in the top bracket, for sure, whatever your filing status. Here’s why it’s a no-brainer.
On 1040 forms for 2021 that’ll be filed in 2022, the 37 percent rate applies when taxable incomes are above: $523,601 for single individuals and heads of household (mostly single parents with children); $628,301 for married persons filing joint returns and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies); and $314,151 for married persons filing separate returns.
As noted in part two, I mentioned to Patrick that the wide-ranging overhaul of the Internal Revenue Code okayed by the former president right after Santa descended chimneys in 2017 has been characterized by some as his most significant legislative accomplishment.
Which folks agree with that assessment? Mostly, those who only watch and read right-leaning outfits like the Fox News channels and newspapers like the Wall Street Journal.
Which folks disagree and say that the overhaul was his sole significant legislative accomplishment? Mostly, those who only watch and read left-leaning outfits like MSNBC and CNBC and newspapers like the New York Times.
A key consideration: when the changes take effect. There are several possibilities.
One I immediately assign to the implausible category: the president persuades our lawmakers to make an increase to 39.6 percent retroactive to the start of 2021. Retroactive tax increases are always unpopular.
While I’m not a gambling man, I’d be willing to bet the family farm that’s one he can’t pull off. Why, Dear Readers, am I so confident?
Because the gang of 535––539 if Mr. Biden has his way and the District of Columbia becomes the 49th state and entitled to two Senate seats and one House seat, same as Wyoming––is a legislative body, a/k/a the United State Congress, that’s almost completely comprised of individuals whose highest priority is to win election after election and to stay in office year after year, which is why the next edition of “Profiles in Courage” won’t mention that they retroactively imposed a higher tax on past transactions.
Another possibility that merits discussion: the increase takes effect on the date the president signs legislation that authorizes it.
Patrick, I’m confident that tax adviser Melania will alert you to a complication in the event that the signing is before 2021 closes: the legislation will empower the IRS to require you to pay at a rate of 37 percent for part of it, and at a rate of 39.6 percent for the balance of it.
Are two sets for 2021 confusing? Yup.
Can Melania and other tax pros cope with two sets? Yup.
Why not, when around 90 percent of taxpayers and paid preparers use software to file 1040s? It’s reasonable for them to assume that their software providers know how to handle revised rates.
A third possibility that I’ll assign to the plausible category: the rate of 39.6 percent goes on the books at the start of 2022.
How will things turn out? I don’t know. As I strive to make my way through these tumultuous times, I ask myself just what do I know for sure?
Fortunately, the answer is a no-brainer. Once there’s some kind of deal, AccountingWeb will help Melania and other advisers field questions from Patrick and other clients about who’s hurt or helped by revised rates.