As 2020 comes to a close, individuals and businesses are looking to carry out their year-end tax planning in a potentially changing political landscape. Although Vice President Joe Biden is expected to be sworn in as president on January 20, 2021 and Democrats have maintained control of the House of Representatives, the Senate remains undecided because of two run-off races in Georgia scheduled for January 5, 2021. If Democrats win both races, then a 50/50 split will exist in the Senate. If Republicans win either race, then the they will retain control of the Senate and may block or modify any significant legislation. Tax advisors and planners are monitoring the situation closely, as President-elect Biden proposes changes to existing tax law that will likely move forward if Democrats gain control of the Senate. A full discussion of Biden’s proposed tax plan in comparison to the current regime can be found here.
Timing of Potential Tax Changes is Uncertain
If Democrats gain control of the Senate, many experts anticipate that significant tax changes will not be enacted in 2021, or at least not made retroactive to January 1st. There are several factors which could contribute to this delay:
- Congress is expected to focus on passing a COVID-19 relief stimulus bill before addressing other policy matters.
- Lawmakers will likely be hesitant to enact any tax increases until the economy has recovered more from the effects of the pandemic.
- The Democratic House has passed numerous bills in previous sessions that were blocked by the Republican Senate and these blocked bills may take priority over any new tax legislation.
- The Democratic Senate would be tenuous due to the 50/50 split, meaning an absence of unanimity or inability to compromise could halt or delay a bill’s progress. There would also be equal party representation on committees, making it more difficult to move bills through the committee process.
- Tax legislation involves competing interests and is often difficult to pass, even with one party in control. President Trump made enacting tax legislation a top priority after being inaugurated in January 2017, but the final Tax Cuts and Jobs Act was not passed until December 2017 (with most provisions made effective in late 2017 or early 2018). The later in the year that legislation is passed, the less likely it is to be made retroactive.
While the prospect of significant tax increases in 2021 seems unlikely, there is still a chance that they could occur, and for this reason taxpayers might evaluate a few year-end planning options. Below are some of the strategies that may warrant consideration due to the tax law changes that Biden has proposed:
- Accelerate bonuses and capital gains. Since tax rates for high-income earners would increase under Biden’s proposed plan recognizing income in an earlier year may be advantageous.
- Bunch charitable contributions. While tax rates on income would increase under Biden’s plan, the benefits from itemized deductions such as charitable contributions are expected to be limited for high-income earners.
- Make gifts to utilize remaining gift and estate tax exemption. Individuals with significant wealth should consider locking in the current historically high gift and estate tax exemption amount by transferring assets out of their estate.
Proceed with Caution
Because of the high degree of uncertainty caused by the current political landscape, individuals and businesses should proceed with caution when engaging in year-end tax planning. Taxpayers should weigh all factors, including the time value of money and an asset’s potential future appreciation, when evaluating whether to implement a potential tax-saving strategy. Transactions that are rushed into due to the possibility of future tax increases may end up losing value in the long run.
As always, any decision should be tailored to your specific situation and made in consultation with a tax professional. For additional guidance on these issues, please contact your BT advisor by calling 770.396.2200.