Post-election, taxpayers are undoubtedly curious about tax consequences and how what’s to come will affect their tax planning efforts in 2020. The 2020 election season is, however, not over, as both Senate races in Georgia were too close to call forcing a run-off. Control of the Senate hangs in the balance, and whether or not the Democrats control two branches of government will likely have a big impact on the tax law changes we see over the next four years.
The Senate Outcome Sets the Timeline
The Senate is heading into 2021 with 50 seats confirmed for Republicans and 48 seats confirmed for Democrats. The final two seats are both in Georgia’s run-off election held in January 2021. If Republicans maintain their hold on the Senate by winning at least one seat in the Georgia run-offs, which I believe to be likely, fewer tax rate increases and progressive changes are expected. In this scenario, taxpayers should expect more generalized, regulatory updates and changes based on issues 100 percent-supported by Democrats, as well as some room for compromise across the aisle to gain some Republican support.
It’s my belief, however, that any tax changes or repeals will not go into effect before January of 2022, at the earliest. So, with a cautious eye on what’s proposed for the future, I am resuming 2020 tax planning efforts based in current tax law.
Key Points of Biden’s Tax Plan for Individuals & Businesses
Regardless of the ultimate congressional outcome, I want to take a look at some key points of Biden’s tax plan for individuals and businesses.
- Biden’s plan does not propose higher taxes for middle class earners. The Biden plan proposes an increase to the maximum tax rate for individuals earning more than $400,000 per year from 37% to 39.6%, to make wages over $400,000 subject to the 6.2% Social Security portion of FICA, and to phase out certain itemized deductions.
- For individuals earning more than $400,000 per year, the plan also changes certain TCJA provisions, including phasing out the qualified business income deduction for owners of pass-through businesses, eliminating the deferral of real estate gains on like-kind exchanges, and limiting the use of certain real estate losses.
- With regard to the tax rate applicable for long-term capital gain and qualified dividend income for earners of $1,000,000 or more annually, Biden’s plan proposes an increase from 20% to 39.6%.
- For the lifetime estate tax exemption, Biden’s plan proposes a reduction to $3.5 million, and it’s possible the timeline for automatic sunset (set for the end of 2025) for the TCJA provision that has allowed for higher exemptions (currently $11.58 million/rising to $11.7 million in 2021) may be accelerated.
- Biden’s plan also proposes a temporary increase in the Child Tax Credit and Dependent Credit, an expansion of the Earned Income Tax Credit for childless workers who are 65 or older, and the reestablishment of the First-Time Homebuyers’ Tax Credit.
On the business front:
- Biden’s plan proposes to increase the corporate income tax rate from 21% to 28%, to establish a corporate minimum tax on book income, and to double the tax rate on GILTI, which will be imposed country-by-country.
- Biden’s plan also proposes a Manufacturing Communities Tax Credit; an expansion of, and permanent status for, the New Markets Tax Credit; and tax credits to small businesses for adopting workplace retirement savings plans.
LGA’s Individual and Business Tax Teams will be carefully monitoring congressional action in 2021 as the Biden administration and the Democratic House majority try to pass tax reform and gain the support of the Republican-controlled Senate. I understand that 2020 year-end planning is challenging, and I am committed to providing my clients with timely, efficient strategies for tax minimization based on current tax law, and while keeping the intricacies of this transition in mind as they continue to unfold. Contact me today to discuss your tax planning needs.
Steven Gallant is a Partner at LGA and has over 30 years of experience in public accounting. He is well-versed in all areas of taxation, including corporate, partnership, individual, trust and estate taxation, and specializes in foreign entity tax, dual citizenship, and expatriate issues. Steve has worked extensively with closely held companies, as well as with investment partnerships, venture capital firms, and related portfolio companies.