As of today’s date, Joe Biden appears to be the President Elect pending additional challenges by President Trump and his legal team. At first blush, Biden’s apparent win should result in adverse changes to U.S. tax policy based on a multitude of his campaign promises, a few of which are as follows:
- Increasing corporate federal income tax rates from 21% to 28%.
- Increasing individual tax rates from 37% to 39.6% for those making more than US$400,000.
- Limiting itemized deductions.
- Increasing the individual capital gains rate from 20% to 39.6% for individuals earning more than US$1,000,000.
- Potential estate tax reform to eliminate the basis step-up on death and reduce the estate and gift tax exemptions from approximately US$11 million to US$5.5 million.
The perceived policy shift to the left would result in most accountants advising clients to accelerate income into 2020 rather than deferring the income to future years and perhaps consider gifting strategies to utilize the existing US$11 million gift/estate tax exemption. This would truly represent “opposite day” (e.g., Seinfeld 1994) for most accountants who generally promote the overriding benefits of income deferral.
But not so fast….
Prior to the election, there was an expectation of a Democratic Blue Wave, whereby the House, Senate and Presidential branches would be controlled by the Democrats. The Blue Wave would provide the ability (i.e., votes) for Democrats to make these adverse changes to Federal tax law.
Currently, it appears the Democrats will control the Presidency and House of Representatives. Control of the Senate is undecided at present with Republicans controlling 50 seats and Democrats controlling 48 seats (including independents). The two Georgia Senatorial runoff elections will be conducted on January 5th, 2021. The Democrats need to flip both of these seats in order to effectuate a 50-50 tie in the Senate whereby Vice President Elect Harris would then have the deciding vote. While the polling in these races is too close to call, most political pundits are of the view the Democrats will not win both of these seats and the Republicans will control the Senate.
Provided this is the result, there should continue to be gridlock in Washington and significant tax reform will likely not occur during the next two years. In addition, we are also of the view that Covid-19 will be the immediate concern for the new administration and tax policy will be relegated to the back burner.
As a result, our advice for most U.S. taxpayers is to not enter into any significant year-end planning out of fear of adverse tax changes.
Please contact your Welch tax specialist if you have any questions or would like to discuss.
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