Update on New and Potential Tax Changes from the IRS and Minnesota

Dear Clients and Friends:

The mission of Schlenner Wenner & Co. is to be a trusted business adviser for our stakeholders by providing exceptional service in a professional, innovative, and responsive manner. As a valued client and friend, it is truly a pleasure being able to work with you and we appreciate your patience and understanding the last 15 months through the pandemic.

This month we will provide an update on some tax changes and potential changes from both the IRS and the state of Minnesota and include the latest newsletters.

The Minnesota legislative session ended without any new tax laws enacted. However, the broad budget agreement includes IRS conformity with both Payroll Protection Plan loan forgiveness and conformity with IRS unemployment compensation relief. The law will need to be passed and signed by the Governor during the special legislative session this summer. The Minnesota Department of Revenue stated that it will review returns and determine whether they can automatically make the necessary adjustments, or whether taxpayers will need to file amended returns. We will continue to monitor both of these issues and provide updates when they become available.

The President recently announced details of the proposed American Families Plan. Here are some of the details:

• Education: Pre-school made available to all three-and-four-year-old children. Two years of free community college will also be made available.
• Child Care: Provide direct support for low and middle-income families. These families will spend no more than seven percent of their income on child care. A national paid family and medical leave program will be created.
• Tax Credits: The child tax credit will be increased from $2,000 per qualifying child to $3,000 per qualifying child six years of age and older. The credit is increased to $3,600 per qualifying child under the age of six. Children age 17 will now eligible for the credit. The credit will also be fully refundable. Qualifying taxpayers will receive the tax credit in the form of a payment, and not a credit on their tax return.
• Tax Credits: The child and dependent care credit will be expanded. Families with children under age 13 are eligible to receive a tax credit of $4,000 for one child and $8,000 for two children. Families making less than $125,000 will receive 50 percent reimbursement. Families making between $125,00 and $400,000 receive partial credit at least as generous as the current credit. Qualifying expenditures include full-time child care, after school care and summer care.
• Tax Rates: The top income tax rate will be increased from 37 percent to 39.6 percent
• Tax Rates: The capital gains tax rate will be increased from 20 percent to 39.6 percent for households making over $1,000,000.
  
• Estate Taxes: Basis step up on property passed down to heirs will be eliminated for gains in excess of $1,000,000. This amount is increased to $2,500,000 per couple when considering real estate exemptions. The gains are not taxed if property is donated to a charity. In addition, the elimination of the basis step up will not apply to family owned businesses and farms where the property is given to heirs that continue to run the business.
• Medicare Tax: The 3.8 percent Medicare surtax is expanded to cover other types of income for those making over $400,000.
• Like-Kind Exchanges: The gain deferral from like-kind exchanges will be capped at $500,000.

These items are a starting point for the President’s plan and changes are likely. We wanted to provide an insight to what the President is thinking. We will keep you posted as more information becomes available.