Tax law changes continue to be a hot topic in the upcoming election. An executive order signed by the President included payroll tax cuts which affect both the employer and employee. Then, during a press conference, he suggested there are serious considerations to lower capital gains rates. So, how do these potential tax law changes affect you? 

Payroll Tax Cuts 

Payroll taxes are withheld from an employee’s salary by the employer, who then transmits the withholdings to the government. There are 2 different types of payroll taxes—Social Security tax, and a Medicare tax. Almost all employed American’s pay Social Security taxes, with the exception of some religious entities and public servants like police officers, correctional officers, firefighters, and teachers. And everyone pays into Medicare. 

Payroll taxes are paid by both the employer and employee. 6.2% paid directly by the employer, and 6.2% paid by the employee. Social Security limits their taxation to $137,700 of your income. Theoretically, if the government eliminates Social Security from your pay stub, you can take your net pay and raise it 6.2%. The elimination of paying into Social Security also offers employers a break of 6.2% on their expenses. 

What about Medicare? Medicare is very similar to Social Security, the only difference between the two is that there is no income limitation and the tax is 1.45% for both the employer and employee. We find it hard to believe Medicare will stop collecting its portion of the payroll tax. If the executive order does call for the elimination of all payroll taxes temporarily, by definition, that is both Social Security and Medicare taxes. It will be interesting to see how this plays out, and our team will update you on our blog accordingly. 

Capital Gains Taxes 

There are two capital gains rates, short-term and long-term. Long-term capital gains are taxed at a more favorable rate depending on your income tax bracket. Current long-term capital gains rates are  0%, 15%, or 20% (see the graph below). Capital gains taxes play a significant role in many transactions, and we manage our clients’ accounts to make sure we are making the most tax-efficient decisions for our clients. If capital gains taxes are reduced, it creates the opportunity to take profits from your investments at an even more reduced tax rate right now. Likewise, if these rates no longer exist in the future, this could be the last chance for people to collect their profits and pay favorable tax rates. 

We understand there are a lot of changes taking place in the world. If you would like to discuss any of the topics mentioned above or build scenarios into your financial plan to analyze potential changes to your financial plan, please do not hesitate to contact our team.