The Year Ahead – Proposed Tax Changes And Their Impact.

Tomorrow, January 2oth, Joe Biden will be sworn in and for the first time since 2009 the Democrats will control the White House, the House and the Senate (though with Vice President Harris providing the tie breaking vote). During the campaign there where a number of proposals, here are some:

●      Increase corporate tax rates from 21% to 28%,

●      For companies with over $100 million in net annual income, a corporate minimum tax of 15%, though net operating losses and foreign tax credits still apply,

●      Increase the Global Intangible Low-Tax Income tax rates, imposed on foreign subsidiaries of US companies, from 10.5% to 21%,

●      Increase the individual top marginal income tax rate to 39.6%,

●      Re-institute payroll tax of 12.4% on income over $400,000, leaving a gap in payroll tax for income over $137,000 and under $400,000,

●      Increase the capital gains rate for filers with income over $1 million to a total 43% (39.6% plus the 3.8% Investment Income Tax)

●      Limit itemized deductions (including charity) to 28% of Adjusted Gross Income,

●      Eliminate the section 199A small business income deductions (now 20%) for incomes over $400,000, over time,

●      Give first-time home buyers a tax credit of up to $15,000,

●      Increase the child care tax credit from an effective $2,100 to $8,000 per dependent,

●      Eliminate the step-up of basis for inherited property,

●      Eliminate tax exempt like-kind exchanges for real estate,

●      Increase estate and gift tax rates by an unspecified amount (it is now 40%),

●      Decrease the estate tax exemption from $11.58 million to $3.5 million, and the gift tax exemption from $11.58 million to $1 million,

●      Add tax credits for certain activities aimed at reducing Climate Change, such as electric vehicle credit, residential efficiency credit, solar investment credit, as well as those aimed at renters, low-income earners and  taxpayers, age 65 and above.

An increase in the the estate tax will foster tax avoidance, both because gifts made during your lifetime are not taxed at your death, whether or not you were taxed when the gift was made, and because there are a number of techniques which takes advantage of the fact that the income tax laws are different than the gift and estate tax laws to reduce the estate tax. It also fosters a level of anxiety over the effect on family assets that are, relatively, illiquid such as a family business or a family farm. Although large in emotional resonance, since only about 3% of estates have more than 50% of their worth tied up in a family farm or business, its impact is small. 

Up until recently, the policy has been to raise the exemption amount, from $1 million in 2000 to $11.58 million in 2020, cut rates and (hopefully) close loopholes. The Biden proposal reverses this trend with a dramatic decrease in the exemption to $3.5 million, and an implied, but unspecified, increase of the tax rates. It could also be seen as closing the stepped-up capital gains on the inherited property loophole. 

The effect of the Biden proposal is not clear, but it is likely that there will be a reduction in savings (to avoid the effect of an accidental transfer), more charitable donations in such a manner as to take advantage of that deduction to reduce the tax on transfers; and, it may have an indirect boost to the economy and to state revenues. It will also generate a flurry of planning for clients with more than $400,000 in income and $3.5 million in assets to try to avoid the tax.

Whether any of these increasing complex plans will work is yet to be seen, since the details are yet to be finalized. I am expecting that in any plan there will be ways of unraveling the actions before the end of 2021 just in case the changes to the tax law will inadvertently case. So stay tuned …