Thoughts on Preparing for Potential Tax Changes

Election season is (mostly) over, and Joe Biden is preparing for his role as President in January 2021. While running for President, Biden proposed significant tax changes. But a big variable in his ability to achieve them will be driven by support of Congress and the Senate. Since control of the Senate won’t be determined until the runoff elections in Georgia in early January, it is impossible to predict if any of the proposed tax changes will actually come to fruition. 

With that said, it is still helpful to understand what may transpire so you can begin to plan accordingly. Let’s take a look:

Biden-Harris Proposed Tax Plan

The incoming administration wants to raise taxes. However, their proposed tax increases apply only to those with significant income and/or assets. Otherwise, tax rates are expected to be the same or lower. The flagship pieces of the Biden-Harris tax plan include:

  • Raising income tax rates for taxpayers with income above $400,000 with a top bracket back of 39.6%.
  • Applying a 12.4% Social Security payroll tax on earnings over $400,000.
  • Limiting the tax benefit of itemized deductions to 28% for those earning over $400,000.
  • Increasing capital gains taxes to ordinary income tax levels (up to 39.6%) for those with adjusted gross income (AGI) over $1,000,000.
  • Eliminating the step-up cost basis for inherited assets.
  • Reducing lifetime exemptions related to estate and gift taxes.
  • Phasing out Qualified Business Income Deductions for those who earn more than $400,000.
  • Raising corporate tax rates to 28%.
  • Increasing credits for childcare and homeownership.

Sunset of the Tax Cuts and Jobs Act

President Trump signed the Tax Cuts and Jobs Act (TCJA) in 2017, which resulted in significant changes in personal, corporate and estate taxes. Many of the tax changes are set to sunset at the end of 2025, and while there was hope that these tax rules would be made permanent at some point, the change of administration brings that likelihood close to zero. So, even if the new Biden administration doesn’t impose new tax regulations, the following will happen at the end of 2025:

  • Personal tax rates will revert to higher 2017 rates, including a top bracket of 39.6%.
  • Standard deductions will revert to roughly half of the current levels.
  • Itemized deductions will be once again more flexible, eliminating the cap on state taxes and reincluding several types of deductions that were eliminated in the TCJA.
  • The individual alternative minimum tax (AMT) exemption amount will be reduced to pre-TCJA levels, resulting in a large increase in the number of taxpayers grappling with what can be a very complicated tax preparation issue. 
  • Elimination of Qualified Business Income Deductions.

Planning for the Future

The foundation of President-elect Biden’s proposal is a reversal of the tax cuts from the TCJA as it applies to high-income taxpayers. If the new administration passes their tax law, it will likely address the sunset provisions of the 2017 law, making a combination of tax cuts and tax raises permanent. (While no one likes paying higher rates, we do appreciate consistency and permanency in tax law.) There are other potential tax increases that could significantly impact high-net-worth individuals and families, including limits on deductions, higher capital gains rates and lower exemptions from estate taxes.

The question for those who may see taxes increase: What can I do, and when should I do it?

The answer: It depends.

Maximizing your tax efficiency sometimes means paying more taxes sooner (as long as the rate is lower), deferring taxes till later or moving deductions into years with higher tax rates. Some of the actions that can be taken include:

  • ROTH conversions in lower tax rate years.
  • Pushing or pulling income into lower tax rate years.
  • Pushing or pulling deductions into higher tax rate years.
  • Bunching charitable donations (potentially through donor-advised funds) to offset higher income.
  • Harvesting capital gains or losses based on many variables.
  • Gifting assets during your life rather than at death.

There is a chance that tax reform under the new administration could apply retroactively to the beginning of 2021, and if so, there may be actions to take between now and the end of the year to save on your taxes. However, historically, very few tax increases have been done retroactively, and the effective date of tax changes may be one of several negotiations between the House, the Senate and the President. Given the uncertainty of what changes may happen and when, it is hard to act on any of these strategies with 100% confidence that they will get the best net result. Therefore, it may be best to wait and see how things evolve and what laws actually get passed. 

In conclusion, every family has a unique set of goals and a unique tax return and, therefore, needs a unique strategy. We are paying close attention to all the variables on a continued basis to help you make the best decisions. If you have any questions or concerns, call us today at (901) 850-5532, or fill out our contact form.

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