The Time to Act Is Now
After two months, Election 2020 has finally come to an end. The sweep of the Senate runoffs in Georgia by the Democratic candidates will, with Vice President-Elect Kamala Harris as the tie-breaking vote, give the Democrats control of the Senate along with the House of Representatives and Presidency. What seemed a remote possibility after Election Day has now occurred, and many are asking, “What does that mean for future tax policy?” The answer lies in the rise of the power of moderates in both parties.
In our previous election articles, we have discussed the tax proposals of President-Elect Joe Biden. As a refresher, they include:
Individual Income Tax Proposals
- Income Tax Bracket Rates Rolls back Tax Cuts and Jobs Act of 2017’s income tax rates for taxpayers with incomes above $400,000
- Increases top rate from 37% to 39.6%
- Long-Term Capital Gains Rate Changes
- Ordinary Income tax rate (39.6%) applies to capital gains for households earning more than $1 million
- Same rules apply to Qualified Dividends
- Repeals “step-up in cost basis”
- Limits the Tax Benefit of Itemized Deductions to 28%
- Creates a phase-out of the Qualified Business Income Deduction under Section 199A for tax filers whose taxable income exceeds $400,000
Estate Tax Proposals
- Estate exemption lowered to either:
- $5 million, not explicitly stated but presumed as part of proposed rollback of certain provisions of the Tax Cuts and Jobs Act of 2017, or
- $3.5 million based on proposals that were discussed when he served as Vice President
- Eliminate “step-up in cost basis” at death
- It remains to be seen whether the plan would tax the gains at death as if assets are sold or if basis carries over and gains would be taxed at subsequent sale by heirs
Payroll Tax Proposal
- Payroll taxes (12.4%) would apply to wages in excess of $400,000
Corporate Income Tax Proposals
- Increases tax rate from 21% to 28%
- Creates an alternative minimum tax on corporations with profits of $100 million or higher
- Increase the minimum wage to $15 per hour
The control of the Senate agenda will be in the hands of the Democrats. However, that does not mean that all of the above tax proposals will automatically become law. We have discussed in previous articles, both before and after the election, that the Senate outcome of 50/50 requires unanimity among every Democratic Senator in order to pass a tax bill. That remains true; however, we are not waiting on Congress to act or not act.
For the better part of the last year, affluent families have been moving forward with planning to utilize the increased Gift, Estate and Generation-Skipping Tax Exemptions. Those exemptions have always been slated to expire on December 31, 2025. While a retroactive change to the start of 2021 is unlikely, it remains possible that they are returned to some previous lower level via a change to the tax law that is enacted before 2021’s year-end. Utilizing the increased exemptions now by executing the necessary documents, along with the gifting and funding that is necessary, should remain the focus for most families.
The final results of the Georgia Senate runoffs and Congress’ certification of the Electoral College would have normally been the most important news of the day. However, January 6, 2021 will go down in history for other reasons.
The impact of the scenes in Washington cannot be ignored. As mentioned above, the events will give rise to the power of the moderates in both parties–Those who believe that doing the right thing should prevail over “my way or the highway.” This group of Senators will be the ones who really control the agenda and determine what laws are passed. Hence, it is more difficult to predict what the final outcome of tax policy will look like.
As a result, the time to act is now, while the rules of the road are clear and direct. For those clients that have been unsure about making gifts, it is time to discuss exemption planning matters with your tax advisors and counsel. Your Oxford team is positioned to ensure that our affluent family clients continue to develop well-thought-out wealth enhancement strategies and implement them timely and efficiently. Consultation with your Oxford team and an analysis of the possible impact of any tax policy changes will allow your full team of advisors to identify the optimal solutions for your family.
Oxford Financial Group, Ltd. Is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Oxford Financial Group’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action.
The information in this presentation is current as of the date of the report and is subject to change. Although reasonable care has been taken to verify this information, its accuracy is not guaranteed. When evaluating the information contained in this report, keep in mind that past performance is no guarantee of future results. OFG-2101-5