By Steven F. Klein, Managing Partner, Gerson, Preston, Klein, Lips, Eisenberg & Gelber, P.A.
The fate of our federal tax policies—and what taxpayers can expect to pay in 2021—is going to come down to the results of Georgia’s two runoff U.S. Senate races on January 5. Basically, if the Republicans win either of the Senate seats, it will likely be two more years of the status quo. However, if the Democrats win both of Georgia’s seats, they will gain control of the Senate, making it easier to enact the new administration’s proposed tax reforms. In the meantime, taxpayers are left in limbo.
As managing partner at Gerson Preston, one of Florida’s premier accounting firms, I have seen families and businesses from various backgrounds struggling to prepare for the year ahead in the midst of these uncertain times. This is not surprising considering that the myriad of different opinions currently flying around would cause even the most experienced accountant’s head to spin.
Ultimately, if you want to create an informed and thoughtful financial strategy, you should lay all the cards on the table and understand how your taxes could potentially change next year.
Below, I offer a breakdown of some major points in the new administration’s proposed tax policies which, hopefully, you and your accountant have already started planning around. Specifically, we’ll look at corporate taxes, estate taxes, capital gains and personal income tax.
Corporate Taxes & International Implications
There are a few potential changes that both U.S.-based and international businesses should be mindful of when looking at next year’s numbers. For starters, the new administration has pledged to raise the corporate tax rate to 28%, up from 21%. It has also called for the elimination of tax loopholes for large corporations that pay little-to-no federal income tax by imposing a “minimum book tax” of 15% on companies with $100 million or more in net income.
On the international front, the new administration has suggested imposing a 10% Offshoring Penalty surtax on corporations that offshore manufacturing and service jobs to foreign nations in order to sell back those goods or services to the U.S. market. This surtax would raise the effective corporate tax rate on this activity up to 30.8%.
While corporate and related business taxpayers should be aware of these possible increases, there are also tax breaks via the CARES Act that they can be taking advantage of right now. In addition to deferring employers’ payroll tax, providing a refundable employee retention credit, and creating the Paycheck Protection Program, the CARES Act also loosened the Tax Cuts and Jobs Act (TCJA) regulations on net operating loss (NOL) deductions. Now, businesses have the ability to provide a five-year carryback for losses earned in 2018, 2019, or 2020. Pass-through business owners may also use NOLs to offset their non-business income above the previous limit of $250,000 ($500,000 for married couples filing jointly) dating back to 2018.
Note, though, that the ability to carryback these losses have a limited time frame, so it is imperative to discuss them with your accountant now.
The new administration’s plan contains three major provisions for estate taxes:
- Currently, individuals can transfer up to $11.58 million before being subjected to estate and gift taxes. Under the proposed changes, that threshold would be reduced to $3.5 million, in bequests at death, and $1 million in lifetime gifts.
- Taxable estates would be subject to a 45% estate and gift tax, up from 40%.
- The “step-up basis,” which allows heirs to receive assets valued as of the day of death, would be removed.
While these modifications would be significant, the truth of the matter is that many of the provisions implemented by the TCJA (including the $11.58 million estate and gift tax exemption) have been set to expire at the end of 2025. Therefore, many high-net-worth individuals have already started to move their assets around with this in mind.
Regardless of which party controls Congress, you should have an estate plan in place that makes sense for your short-term and long-term goals. Namely, through the use of trusts and other vehicles, transfers of family assets to the next generation can be achieved by making maximum use of the current lifetime estate and gift exemption of either or both spouses to avoid estate taxability.
Most importantly, when organizing your estate plans, you should work with an advisor who understands the complexity of family dynamics and does not just plan in a purely tax-motivated way. Economic and lifestyle considerations need to be addressed and factored into any effective estate plan; otherwise, transfers of wealth could get tricky down the line.
Capital Gains & Individual Tax
While the new administration has promised that individuals earning less than $400,000 per year will not see any increases in their personal income taxes, individuals making above that amount would revert to a 39.6% personal income tax rate, up from 37% implemented by the TCJA. The tax benefit of itemized deductions (e.g., charitable donations) would also be capped at 28% for those earning more than $400,000, compared to the current 37% rate. Moreover, we could also see the capital gains rate increase to 39.6% for individuals with income over $1 million, up from 20% currently.
Basically, if you are amongst the country’s wealthiest individuals, you could face some serious tax increases. If you do not want to risk waiting for the results of Georgia’s runoff election before making a plan, there are certain options you can consider. For instance, if your income is greater than $400,000 and you were planning to make a charitable donation in 2021, you might choose to make it before the end of 2020 to guarantee you will receive a larger tax break. Or, if you earn more than $1 million in income and were planning to sell certain assets next year, you may want to sell them this year instead to avoid the potential 19.6% increase in capital gains taxes. Ultimately, though, the economic decision to sell an asset is always yours to make.
Though the potential changes to the tax code may seem overwhelming, it is important to remember that this is all speculative at the moment. Regardless of which party controls the Senate, it is uncertain that many major changes will be implemented before 2022 given the country’s current economic state and the ever-lingering threat of the pandemic, but it is wise to plan accordingly.
At Gerson Preston, our team of highly skilled accountants has helped high-net-worth individuals and businesses both domestically and internationally adapt to the ever changing regulatory landscape for more than 60 years. If you are ready to start planning for 2021, the team at Gerson Preston is here to help. Please visit us at gpkleg.com.
 All tax figures in this article are sourced from Watson, G., Li, H., & LaJoie, T. (November 9, 2020). Details and Analysis of Biden’s Tax Plan. https://taxfoundation.org/joe-biden-tax-plan-2020/