2021 Taxes, What Can We Expect?

notepad that reads "year end review"

“In this world nothing can be said to be certain, except death and taxes.” The famous words of Ben Franklin in his letter to Jean-Baptiste Le Roy in 1789, are as true today as they ever were. The last year has proven just how fleeting normalcy and life itself can be. Many of the simple activities and freedoms we took for granted prior to the pandemic now require so much more consideration. No longer is a simple dinner with family members just a simple dinner.

With the dramatic upheaval we have all endured over the last year, we have seen substantial federal fiscal response of more than $5 trillion dollars. We have seen a dramatic shift in congressional party divisions and we now have a new president. With the greater availability of testing and more vaccines becoming available, we are hopefully turning the corner on the coronavirus and these trying times. Along with all of these changes to our “normal” daily routine and lives, we are also likely turning the corner into a new phase of taxation.

To be quite honest, we don’t know what tax changes will be coming from Congress and the President. If we look to our past to predict the future, we see that the ebb and flow of Republican/Democratic control in Congress and the Presidency correlate to the rise and fall of income tax rates, estate tax exemptions, and capital gain tax rates. Unfortunately looking to our past only provides but so much insight given the unprecedented economic impact and loss of life we have endured over the last year.

President Biden’s campaign agenda “Build Back Better” included tax incentives for clean energy, greater access to healthcare, greater access to education, increased funds for infrastructure improvement, and forgiveness of student loans. With our daily news sources now providing more and more positive information regarding the pandemic, it’s very likely that Congress and the President will start to focus on more of their campaign promises. The lack of political opposition President Biden faces in Congress provides an even clearer path to meet his campaign goals and promises. Just recently we have seen action taken by President Biden to forgive some student loan debt. Even if you don’t include the trillions of dollars of pandemic stimulus already allocated, simple math leads us to believe the government will eventually need additional revenue to meet these goals. The most likely source of increased revenue will be an increase in taxes, but the question remains which taxes and how much?

The potential changes by many so-called “tax experts” have prognosticated on regarding our federal income tax regulations are almost countless and vary significantly. Most tax professionals agree we will see increased tax rates and changes to our federal tax income brackets. Currently the highest individual income tax rate sits at 37% as a result of the Tax Cuts and Jobs Act of 2017 (TCJA). A return to pre TCJA max tax rates of 39.6% is quite foreseeable for those taxpayers earning more than $400,000. In recent times, the magic income number where tax rate changes are likely seems to hover around household income greater than $400,000. President Biden’s administration and certain members of congress have indicated that households with income below that threshold should not see an increase in taxes. Time will tell on these assurances.

The second likely change, will target capital gain rates. Our current capital gain tax rates are based on an individual’s income with the top rate maxing out at 20%. Anecdotally, the capital gain tax doesn’t seem to garner as much attention or emotion from the general public when compared to the more galvanizing reactions to increasing income tax rates or discussing the dreaded “death tax”. One of the more frequently discussed changes involves treating capital gains as ordinary income for income earners above certain thresholds ($1 million seems to be a generally accepted threshold). There is also the possibility that unrealized capital gains (in excess of $100,000 per person) would be taxed at the death of the asset owner. This would diverge from the current laws where the basis of capital assets is “stepped up” to the date of death value for subsequent heirs. Thus, no capital gains are realized at the death of a loved one, and the inheriting individual has a better tax position should they sell the capital asset in the future. Keep in mind, it’s almost impossible, and quite foolish in some instances, to make changes in estate planning strategy before these laws are passed. Even with changes in capital gains tax treatment, many of the strategies we already utilize with clients would still work for tax mitigation.

To elaborate further on tax implications at death, it appears that the current estate tax exemptions may also be on the chopping block. Currently individuals have a federal estate tax exemption of $11.7 million dollars as a result of the TCJA passed in 2017. These provisions are due to sunset at the end of 2025 and will revert back to 2010 estate tax exemption amounts of $5 million per person (with an inflation adjustment). President Biden’s administration has indicated a desire to reduce the estate tax exemptions to $3.5 million per person and increase the top estate tax rate to 45%.

When it comes to business tax changes, the President has shown intentions to increase the current corporate income tax rate from 21% up to 28%. This would present certain difficulties for US corporations when you consider how many other countries have lower and more corporate-friendly tax rates. As an example, the United Kingdom’s current corporate tax rate is less than 20%. This change could certainly incentivize corporations to “shop around” and move to corporate tax-haven countries. When it comes to small businesses, there has been discussion to also reduce the Section 199A 20% deduction of qualified pass-through business income. According to the US Tax Policy Center, this change to pass-through business income could affect more than 60% of pass-through income from businesses.

It is important to keep in mind that all of the potential tax changes discussed are just that, potential changes. Most people agree, regardless of where they fall on the political spectrum, that President Biden and Congress’ agenda is quite ambitious. In essence, we are not likely to see all of the discussed tax changes come to fruition. We at JGB will continue to monitor any changes and update our clients and friends of the firm. Please note that even if we do see changes to the tax laws, they would most likely come into effect in the year following passage and not take a retroactive effect. This would still give time to implement certain planning opportunities under the current tax code. Of course, that is assuming that Congress does not pass a bill in the final days of the year, like they did in 2010 to change the estate tax exemptions and in 2019 with the passage of the Secure Act (changing inherited IRA rules).

With every change to the tax laws, there are still opportunities to minimize taxation. Many of the tax strategies we currently utilize with our clients will very likely continue to work towards an efficient transition of wealth and legacy to loved ones. The foundation of proper planning still revolves around having estate planning documents in place prior to disability and death. Revocable Living Trusts continue to be a great planning option to claim estate tax exemptions for couples and of course they avoid the time delays, costs and lack of privacy associated with probate. If you have questions regarding your current plan, or would like to adjust your plan, please contact our office to set up an appointment with your respective attorney.

Related Posts
  • The CORPORATE TRANSPARENCY ACT (CTA) What you should know at a glance Read More
  • What are Spouses Entitled to at the Passing of the First Spouse? Read More
  • Cost Basis Rules Clarified by IRS Read More