With higher taxes possible, here’s what to do now

Some tax issues will play out later this year. One of them concerns individuals who own a business and pay the self-employment tax. They pay 12.4 percent of their income in Social Security taxes and 2.8 percent for Medicare, but only on the first $ 142,800. This cap could be lifted, making all income subject to self-employment tax.

One strategy is for owners to convert their business from a limited liability company to a subchapter S company, which could lower the self-employment tax, said Edward Reitmeyer, partner in charge of taxation and business services at Marcum, an accounting firm.

But it must be done with care. What an S corporation pays in distributions out of the profits of the business itself is exempt from self-employment tax. But the owner of S corporation cannot just issue distributions to himself; he must take a certain amount of compensation which will be subject to self-employment tax.

“The IRS comes after you if your pay is too low,” Mr. Reitmeyer said. “But with this structure, you are at least prepared if there is a change to the unlimited self-employment income tax.”

Perhaps the biggest concern for this year is what happens to the capital gains tax rate, currently 20%. Most wealth advisers bet on an increase, probably at the same level as income tax. It’s not that big a jump for most employees, but it would be for someone in the top tax bracket, 37%.

The amount of tax you pay on increasing the value of your stocks is one of the few taxes you can control, because it’s up to you when you sell stocks. But you have to calculate whether it makes more sense to sell stocks that have appreciated, especially after the 2020 ramp-up, and pay tax now or keep them.

Several factors come into play here. If the strategy is to hold onto those securities until you die and not pay capital gains tax, that tax break could end, as my article last week pointed out. The Biden administration could remove the provision that fixes the value of an estate’s assets upon the owner’s death, wiping out years of capital gains. Instead, the administration could require the heirs to pay taxes on those gains when they sell the assets.