As U.S. Congress advances Democrats’ tax plans, America’s wealthy eye loopholes

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NEW YORK (Businesshala) – As Congress looks to advance its $1.75 trillion spending package this week, wealthy individuals are already planning ways to avoid paying for it.

FILE PHOTO: A protester during a national day of resistance calling for a safe, scientific, racially just and fully funded approach to the reopening of schools during the coronavirus disease (COVID-19) outbreak Wears a “Tax the Rich” T-shirt. Los Angeles, California, US, August 3, 2020. Businesshala/Mike Blake/File photo

Lawmakers are expected to vote this week on the Democrats’ social spending bill in the US House of Representatives, which will lay the groundwork for the Senate to take it up.

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The package would be the largest extension of the American safety net since the 1960s, and Democrats decided to pay for it by imposing a 5% surcharge on individuals with more than $10 million in annual income and an additional 3% tax on individuals over $25. has been proposed. million in annual income.

While the White House says the new surcharge for paying the spending bill could generate $230 billion, experts and bankers say many individuals will find ways to avoid it and that it will raise less than an earlier proposal for the billionaire tax.

“While on paper the bill looks like it would sharply increase taxes on ultra-millionaires, it’s not really that much of a bite,” said Emmanuel Saez, a professor of economics at the University of California at Berkeley.

The proposed billionaire tax, targeting some 700 Americans, has been making headlines in recent weeks and has drawn frustration from the world’s richest man, Elon Musk.

That proposal, which taxed unrealized share gains, was abandoned after moderate Democrats opposed the plan, arguing it unfairly targeted money creators.

Despite this, Musk sought to get ahead of any future Democratic plans to increase taxes by selling $6.9 billion in Tesla Inc stock last week.

The exact details of the bill on which the House will vote are not yet known. Bankers, lawyers and academics expect it to include the White House’s proposal for an additional tax of up to 8%, but not the billionaire tax.

Planning is straightforward for wealthy taxpayers, said Alvina Low, chief wealth planner of the Wilmington Trust.

“The goal is to bring your modified adjusted gross income below the threshold and the tax doesn’t apply,” Low said.

In contrast, billionaires’ taxes “would have been very difficult to save,” said Lisa Featherangil, Comerica Bank’s national director of wealth planning.

The levy would apply to individuals with net worth of more than $1 billion or who earned more than $100 million for three straight years. In order to avoid paying tax, individuals have to halve their income or assets by at least half.

“If you have a billion dollars, it’s not easy to reach $500 million,” Feathergill said.

S Corps and C Corps

Some wealthy people want to bring their personal income below the $10 million threshold for 2022 by shifting the income they receive through so-called S corporations or through tax structures to C corporations.

S corporations are popular among Wall Street investors and owners of private equity firms and hedge funds. This is because the structure allows them to declare their income from the business as personal income – avoiding the additional layer of corporate income tax.

In the proposed bill, the S Corps is taxed at the federal level at a top rate of 48.8%, and California and New York are taxed at a rate of over 60% when adding state income taxes.

By changing their S corporation tax structure to a C corporation, wealthy individuals should be able to keep their annual personal income below the $10 million threshold — although the downside is that those incomes must be retained in the business where they are corporate. Will pay tax 21%.

stock turnover

Bankers say even wealthy individuals are selling stocks before the statute goes into effect this year and are planning to spread out future stock sales over several years.

Low said individuals would still pay capital gains and investment income taxes of up to 23.8%, but that’s less than the 31.8% tax the highest income earners could pay the next year in total if the spending bill is passed.

It is unclear whether Democratic lawmakers are aware of the potential loophole.

Frank Clemente, executive director of Americans for Tax Fairness, said the tax surcharge was a “major improvement” but not enough.

“The millionaire surcharge does not fix the problem of unrealized capital gains,” he said. “Billionaires’ income tax, on the other hand, would solve the tax-exempt billionaire scam.”

Reporting by Elizabeth Dilts Marshall in New York; Editing by Matt Scuffham, Michelle Price and Matthew Lewis

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