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Is retroactive liability the next trend for California taxpayers?

It is no secret that California maintains the highest income tax rate in the nation. Yet, nearing the tail end of a catastrophic global pandemic, more judicial proposals seek to target earnings.

Pending tax bills would extend beyond an increase on future income. If passed into law, the current proposed statutes would also introduce America's first tax levy on accumulated wealth.

Assembly Bill 1253: increased income tax proposals

As it stands, the changes imposed by Assembly Bill 1253 would increase tax bills by:

  • 1% on incomes that exceed $1,181,484
  • 3% on earnings over $2,362,968
  • 3.5% on returns greater than $5,907,420

To add insult to injury for high-income earners, this legislation would apply to the above adjusted incomes dating back to January 1 of this year. Although targeting the rich with a 16.8% tax rate might seem favorable to those in lower tax brackets, it could also have a detrimental effect on small business owners.

While entrepreneurs struggle to keep their doors open after shelter-in-place orders, riots and new payroll policies, AB 1253 could further compound economic setbacks for over 20,000 sole proprietors who pull in more than $1 million per year. Meanwhile, close to 60,000 S-Corps and partnerships could also feel the burn of yet another financial burden.

Does such a levy restrict rights?

Proposed as a levy, the bill would allow the IRS to seize property to satisfy newfound delinquent tax debt. Opposed to a lien, which functions as a claim against property to secure tax payment, a levy can legally result in property loss.

Before the IRS confiscates assets, it must issue a tax bill, notify taxpayers of their right to a hearing and declare its intent to contact third parties about collection attempts. Although the act would take immediate effect, it is too soon to say how much time might pass before the regulatory agency claims control of:

  • Bank accounts
  • Real property
  • Retirement savings
  • Wages
  • Vehicles
  • Professional licenses
  • Life insurance

Whether establishing a means of satisfying retroactive liability is possible remains to be seen. Therefore, courts could experience an influx of tax disputes as taxpayers strive to protect their possessions, as well as their rights, from government control.

For pending legislation, relocation is of no consequence

In addition to the proposed income tax increase, lawmakers consider establishing an unprecedented net worth tax. An historical first, Assembly Bill 2088 would impose a 0.4% state tax on all net worth over $30 million.

At some point, one might wonder whether the palm trees, sunny beaches and laid-back culture are worth continual assessments on earned income. However, those who consider uprooting should be aware that the projected Wealth Tax Act would apply for ten years, regardless of state residency.

America has no cap on prosperity

Regardless of the advancement of potential regulatory revisions, the United States tax code contains tremendous complexities. No matter the situation, taxpayers have the right to question IRS practices and protect their constitutional rights.

Whether filing a return is perfunctory or protecting a family legacy is of concern, an experienced tax attorney can maximize deductions and suggest ways to shelter hard-earned wealth. After all, the legal system must recognize a way to prosper in a country founded on free enterprise.

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Law Offices of Robert T. Leonard, APC

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