Now that the 2020 elections are over (i.e., pending potential recounts, possible judicial review of various issues, and certification of results by the states), it is time to consider potential key tax law changes that may affect you in 2021 and beyond. Given the election results, many tax and fiscal issues remain uncertain. Today, it appears that tax legislation may be in the offing. No doubt, the ultimate make-up of the tax laws will depend on the direction taken by our nation’s leadership (including President-Elect Biden and Congress), either by their ability or inability to agree on tax and fiscal legislation.
Post-election Uncertainty Remains
With a new President and Congress coming in 2021, there are many variables and hurdles to overcome regarding any legislation (including tax legislation). As it stands currently, nothing has changed regarding income, estate, gift, generation-skipping transfer, payroll, etc., taxes. When debating budgetary issues, Congress must address projected deficits, anticipated increases in infrastructure spending, projected increases in defense spending, proposed tax increases, funding Social Security and SSDI, funding Medicare, etc. These "new" or additional expenditures, combined with the approximately $27 trillion of current National debt, should reinforce the need for you and your family to build absolute and significant flexibility into financial and estate planning scenarios. More importantly, you and your family should have a renewed focus on providing income and protecting family wealth for current and future generations.
With respect to income and estate tax changes, there are several obstacles to overcome. While there may be a focus on potentially raising income and estate taxes, there is not currently a clear path to higher federal taxes. For example, it remains unclear whether there will be a Republican or Democratic Senate majority in 2021, given a couple expected election runoffs in early January 2021. Thus, if the Senate control is not decided until after 2020, year-end tax planning will be difficult because of the uncertainty of the Senate majority in 2021. Ultimately, if the Senate remains in Republican control, most of the existing tax laws may remain in effect at least until the 2022 elections. If the Senate comes under Democratic control in 2021, one should expect income and estate tax law changes to be enacted.
Assuming there will be tax law changes, will they be “permanent”? The democratic process in the U. S. is ever changing— a Presidential election every 4 years, The House’s 435 members are elected every two years and, in The Senate, approximately 1/3 of the members are elected every two years. Given this dynamic, even if income tax rates increase and the estate tax reverts to a lower exemption amount (as called for by President-Elect Biden), the democratic process may cause a return of higher (or lower) income tax rates and estate tax exemptions at just about any time in the future. One only needs to recall 2010, when the estate tax was repealed for one year, as evidence of tax law “permanency”.
Considerations Given the Post-election Uncertainty
The following are various tax proposals as set forth in President-Elect Biden’s campaign.
Selected potential changes:
If you believe President-Elect Biden’s income and/or estate tax campaign proposals will become law in 2021, you might consider the following actions.
- Accelerate income recognition to taxable year 2020, where income tax rates may be lower if income tax legislation increase income tax rates.
- Consider year-end bonuses
- For cash basis professionals, send year-end payment of expenses on or before December 31
- For those contemplating a Roth conversion, 2020 rates could be lower
- Maximize retirement contributions (e.g., 401(k) and deductible IRAs)
- Assuming itemized deductions are otherwise allowable, accelerate income tax deductions to 2020, because income tax deductions may be limited under new legislation. Some items to consider include:
- Itemized deductions (e.g., mortgage interest, state income and property taxes, charitable contributions, etc.)
- Maximize (where appropriate) the use of expensing depreciable property under IRC section 179 (for acquisition of depreciable property in excess of the IRC section 179 deduction)
- Utilizing tax loss harvesting in 2020 as you would in other taxable years.
- With respect to estate planning in 2020, utilize gifts of the current $11.58 million (per person) exemption, valuation discounts, non-reciprocal spousal lifetime access trusts, and other estate and gift tax reducing strategies.
Given the Above Post-election Uncertainty, Flexibility in Planning is Critical
Taken together, the issues raised above generally point to at least one absolute. That is, financial, business, and estate planning will require constant monitoring and updating.
Considering the ever-changing political environment, you need to plan for many contingencies with respect to tax planning. For example, there may be (1) higher or lower federal income taxes, (2) modification or elimination of the Affordable Care Act Net Investment Income taxes, (3) modification of transfer taxes (e.g., estate, gift and generation-skipping taxes), and/or (4) unanticipated changes, etc. Because of the current state of politics, you and your advisors need to understand the potential outcomes under higher, lower, or similar tax rates. While tax rates are likely to change, income and/or deductions may be limited or excluded under new legislation. Given the potential changes over the short- and long-terms, traditional financial, estate and tax planning may become a year-round endeavor focusing on flexibility and multiple year planning.
It is tempting to defer financial, estate, and tax planning while waiting for President-Elect Biden and Congress to act; such a strategy is not recommended. Rather, you should continue your financial, estate and tax planning. A major focus of such planning, however, should be on the flexibility of the plan given the potential tax legislation.
Finally, you and your advisors should consider all facts and circumstances (e.g., market risk and company risk, time horizons, low interest rates, tax issues, geopolitical risks, etc.), regarding any course of action. In other words, relying solely on a projected tax outcome does not generally result in the optimal financial outcome.
I hope this information is helpful. If you would like to discuss any of the items, please do not hesitate to call.