Nothing is yet set in stone, but we want to alert clients to “expect the unexpected” when it comes to potentially significant tax and regulatory policy changes in 2021.
The first hint of things to come may be hidden in President Joe Biden’s American Rescue Plan. The $1.9 Trillion COVID-19 relief package represents the Biden administration’s response to the urgent needs of the pandemic and includes a host of other provisions, including the extension of enhanced unemployment benefits that are due to expire at the end of March, as well as an extension of the moratorium against evictions and foreclosures through September. The $1.9 trillion economic relief plan also includes:
- An additional $1,400 direct stimulus checks for qualifying Americans,
- A raise of the federal minimum wage to $15 per hour,
- Sum of $350 billion in emergency funding for state and local governments,
- Expanding the Child Tax Credit to $3,000 per child and make it fully refundable, and
- Tripling the maximum Earned Income Tax Credit and extending eligibility for workers without children.
The proposal is the first step in a two-part plan to be followed by an economic recovery plan called the Build Back Better Recovery Plan. The American Rescue Plan will bring the total amount of Covid-19 relief to over $5 trillion.
2021 could bring significant legislative tax policy changes. Under the Biden plan, the top income tax rate on taxpayers with income greater than $400,000, will most likely revert back to 39.6%, the top rate prior to the Tax Cuts and Jobs Act (TCJA). Many of the other TCJA tax cuts could be rolled back as well, including the 21% corporate tax rate. While the top rate is not likely to go all the way back up to 35%, it could be increased to 28% as a way of seeking compromise with Republicans. There are rumors of a new corporate alternative minimum tax, increased social security taxes on income above $400,000 and capital gains rates on income above $1 Million.
The administration might also try to increase the long-term capital gains tax rate, which is 15 or 20%, depending on the taxpayer’s profile. Ideas being thrown around include taxing long-term capital gains and dividends, for over a million, at the ordinary rate, which Biden would raise back up to 39.6%. The top rate is now at 37%.
The biggest tax policy changes might be in estate and gift, where Biden’s proposals look to eliminate the step-up in basis at death for inherited assets, and reduce the estate tax exemption from the current $11.7 million amount to pre-TCJA levels of $5 million. There might even be a roll back of provisions in last year’s CARES Act like the removal of limitations in the TCJA on carrying back the net operating loss deduction.
Some fear that these tax increases will be retroactive to January 1, 2021, which is unlikely because unemployment is still high, and given the slow economic recovery from COVID-19, it’s not an ideal time for significant tax increases.
The Democrats appear to be ready to use a budget reconciliation strategy, which requires only 51 votes, to push through the relief package, which means that some of the tax provisions would likely expire in the next few years. Since the bill will have a shelf life there will not be a permanent tax policy.
Despite the move toward a reconciliation strategy to get the stimulus package passed to meet the urgent economic needs from the pandemic, Democrats seem to recognize the need to work on a bipartisan basis on tax legislation.
Recent bipartisan efforts resulted in a December stimulus bill that provided Economic Impact Payments of $600 for individuals, $1,200 for families, and an extra $300 per child. It provided a 2nd round of the Paycheck Protection Program and extended a number of tax credits, in some cases permanently. The provisions clarified that businesses’ forgiven for PPP loans could deduct the regular business expenses that are paid for with the loan proceeds. It expanded the Employee Retention Credit and charitable contribution deduction and the temporary full deduction for business expenses for food and beverages provided by a restaurant.
The tax extender component renewed for at least 12 months all but a few tax provisions that would have expired in 2020. Some provisions were actually made permanent and others extended for as many as five years. Permanent tax provisions included deductions for certain energy-efficient commercial building expenses and reduced the craft beverages excise tax. The look-through rule for payments related to controlled foreign corporations, the New Markets Tax Credit and the Work Opportunity Tax Credit were extended.
Biden has made a big push for manufacturing domestically and could be considering expanding the research tax credit, so that instead of amortizing it over five years under the TCJA rules, it could be deducted the same year, as it used to be prior to the passage of the TCJA. Look for a push for tax incentives for green energy and infrastructure.
Reach Out To Us: Businesses and individuals will need to keep an eye on tax changes coming out of Congress this year. It is likely there won’t be tax increases until later in 2021 or on January 1, 2022, which gives clients time to plan. Tax planning can help reduce your tax liability significantly. Talk to our professionals today and start saving tomorrow. Call toll free 855-542-7537 or email CPA@Fuoco.com.
