New Tax Laws Predicted

When elected, most Presidents have successfully enacted many significant tax proposals in the first two years in office.

President Biden is doing things a little differently. Because of the coronavirus pandemic, Biden has divided his tax proposals into two efforts.

In the immediate short term, he is seeking to quickly enact COVID-related relief for individuals and businesses. President Biden proposes a relief package that includes provisions to help individuals who have lost incomes due to the COVID pandemic and businesses that have been forced to shut down or restrict operations. Many of these proposals are extensions of provisions enacted in 2020 that have expired or sunset soon.

In the long term, Biden’s tax proposals include provisions that focus on growing the economy post-COVID.  He hopes to enact tax reforms focused on tax increases on wealthier individuals and corporations, tax breaks for lower income taxpayers, and tax provisions to promote domestic job growth and clean energy.

But when will these tax increases occur? I predict that the tax increases will be enacted for next year in 2022.  Why? Because tax laws take time. Also the slim Democratic majority in congress will prevent fast track legislation and require time to negotiate and compromise with conservative Democrats and moderate Republican legislators.

Will the tax laws be retroactive to 2021?  Probably not. While retroactive tax legislation is constitutionally permitted, it is unfair (and politically unpopular) to change the laws in the second half of 2021 after taxpayers’ reasonable reliance on the laws in their tax planning and transactions.

I predict the following tax law changes:

Individual tax increases:

  • Raising the top individual tax bracket back to 39.6% with no tax increase on those with incomes less than $400,000
  • Eliminating the low capital gains tax rate for individuals with incomes over $1 million
  • Placing a cap on itemized deductions for wealthier individuals
  • Increasing the SALT deduction for state and local taxes beyond $10,000
  • Returning the estate tax exemption amount to pre-Trump levels of $5.0 million
  • I do not expect an elimination of Basis “Step-up” at Death, which currently (and favorably) increases the income tax basis on the date of death to its fair market value as of the date of death. Many previous government attempts to eliminate the basis step-up at death have been unsuccessful.

Business taxes:

  • Raising the top corporate tax rate to 28% from 21% and phasing out the 20% qualified business income deduction
  • Imposing a minimum 15%tax on large corporations, imposing additional taxes on businesses that shift jobs overseas, and more tax breaks for businesses that increase domestic jobs

While numerous uncertainties exist, all clients should familiarize themselves with Biden’s tax plans, and position themselves to act in case of new laws.  Some clients have already started income and estate tax planning and consultations in anticipation of the expected tax law increases.  Please reach out to our office with questions or complete this form.