One of the most likely changes in the tax law will be an increase in…
The big question on a tax increases is not “if” but “when”
We expect taxes to increase. The big question however is when the increase(s) will take effect.
Although it is politically unpopular and unfair to change tax laws after people rely on them in making transactions through the year, legally (and constitutionally), a tax increase can be imposed retroactively (i.e., starting effective January 1, 2021).
A review of the most recent major tax law changes over the past two decades is not helpful because they lower taxes, and in those cases, they were intended to be stimulative and therefore intentionally retroactive.
Conflicting evidence comes from a Treasury official who recently spoke to the American Bar Association: “You want to have a tax system where people, taxpayers, can react to the increases in the tax system so that they can change their behavior,” Mark Mazur, the Treasury Department’s deputy assistant secretary for tax policy, said at the American Bar Association tax meeting. “When you do retroactive tax increases that’s not possible. That tends to be not the first choice.” However, he also said that the Biden administration might consider retroactive tax increases because they had been under discussion for a long time and taxpayers had effectively been “given notice.” It is true that Biden had explicitly campaigned on increasing taxes.
I predict that tax increases will be enacted starting January 1, 2022. Why? Because tax laws take time. The razor-thin Democratic majority in congress will prevent fast-track legislation and require time to negotiate and compromise with conservative Democrats and moderate Republican legislators. Also, 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 also predict the returning the estate tax exemption amount to pre-Trump levels of $5.0 million, which will effectively raise estate taxes on many of our clients. Many of our clients are actively creating SLAT trusts to gift substantial assets this year to reduce taxable estates.
Regardless of the timing of the tax changes, 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 (such as gifting to children) and consultations in anticipation of the expected tax law increases. Please reach out to our office with questions or complete this form.
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