Post-Election Tax Planning
By: Edward Nieh, Senior Tax Manager (Doyle, Schultz & Bhatia, PLLC)
Notwithstanding the judicial challenges of the election results, Joe Biden and Kamala Harris are now the president- elect and vice president-elect of the United States. The tax implications of the election are significant. Let’s examine what president-elect Joe Biden has in mind when he takes office.
Tax Rate Hike:
President Donald Trump’s most significant tax legislation was the Tax Cuts and Jobs Act (“TCJA”) which brought down the corporate and personal income tax rates from 35% and 39.6% to 21% and 37% respectively among many other changes to the tax law.
Biden’s believed that the TCJA helped large corporations and wealthy individuals pay less taxes. His plan would include raising the corporate rate to 28%. He would also double the rate on U.S based multinational corporations (GILTI) from 10.5% to 21%. In addition, Biden would phase out the section 199A passthrough deduction for those individuals whose income exceeds $400,000.
With regards to individuals, Joe Biden proposed reinstating the 39.6% tax rate, limiting itemized deductions to the 28% tax rate and restoring phase down of itemized deductions. Regarding capital gains, individuals with income greater than $1 million would not be eligible for the special long-term capital gain rates but would pay tax on capital gain and qualified dividends on the generally higher ordinary income rates.
Under current law, both employees and employers split the 12.4% Old Age Survivor and Disability Income (OASDI or Social Security tax), each paying 6.2% on the first 137,700 earned in 2020. In order to fund the anticipated shortfall in Social Security, Biden proposes a “second tier” of social security taxes on wages above $400,000 in which a 12.4% rate would be applied on an amount in excess of $400,000 without a cap.
Estate and Gift Taxes:
The president-elect has also indicated a preference to lowering the lifetime gift exemption down to $5 million or less while also increasing the current estate rate of 40% to 45%. He also has expressed the desire to eliminate the step up on appreciated assets held by a decedent at date of death, which was proposed while Obama was in office.
Likelihood of these Changes:
In order for the Biden changes to take effect, Congress must write and approve these legislations before they can be signed into law. At the current writing, democrats have control of the House while the Senate is much more precarious as neither party has a majority (with Georgia runoff expected on 1/5/2021). While it is expected that the final legislation will not look like what either party would like, certain aspects of the tax legislation could certainly be enacted in the future.
It is prudent that taxpayers consider tax planning strategies should they believe that parts of Biden’s proposal could come to fruition. Some strategies could include:
- Accelerating Income into 2020: Taxpayers should consider increasing invoicing, push collections of receivables and accelerate work from 2021 to 2020. Other strategies may include harvesting gains, ask bonuses to be paid earlier, taking distributions from retirement plans, avoid like-kind exchanges and optout of installment sales. If you have a transaction to sell property or a closely held business, try to close the deal before year end.
- Deferring Deductions to 2021: For businesses, electing out of bonus depreciation, put off equipment and supplies purchases, deferring repairs to 2021 and delay the payment of accrued compensation after 3/15/2021 and other liabilities may be in your best interest. For individuals, it may make sense to make a ROTH IRA or ROTH 401(k) contribution, if possible, deferring charitable contributions, medical expenses and tax payments until 2021.
- Estates and Trusts: Consider the tax benefit of the $11,580,000 per person lifetime gift exclusion amounts.
For all taxpayers, there are a myriad of options available to save money. A new President and the potential of new tax legislation means there is an opportunity for tax planning. The team at Doyle, Schultz & Bhatia, PLLC is ready to assist your needs and help provide taxpayers with a customized plan to minimize their tax liabilities.
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Edward Nieh, CPA, MST
Senior Tax Manager