Keeping Tabs on Tax Changes

Sep. 8, 2021

The tax code has been through a whirlwind these past few years. We’d forgive our readers if they have a hard time keeping it all straight.

To briefly recap, the changes started at the end of 2019 with the passage of the SECURE Act, which changed a number of rules relating to IRAs and retirement plans. Then, in early 2020 when the pandemic was beginning, various COVID-relief bills were put in place, such as the CARES Act, and the multitude of changes they brought. And most recently, there are the ambitious ideas being pursued by the Biden Administration and its Congressional allies. And all of that doesn’t even count President Trump’s signature Tax Cuts and Jobs Act of just a few years prior!

Financial planning best practices are continuing to evolve in today’s quickly shifting landscape. For those interested in peering around the corner, highlighted below are a few of the key proposals we have on our radar for the rest of 2021.

The Next Shoe to Drop

Months and months in the making, a $1 trillion infrastructure bill passed the Senate in early August. The most recent indications are that the House has agreed to vote on the bill in late September.

Rather than including any tax increases along with the spending, the bill makes use of several non-tax offsets. In addition, the $1 trillion number includes pre-authorization for 5 years of typical transportation maintenance spending. This spending is not really ‘additional spending’, further bringing down the real size of the infrastructure thrust and lessening the political pressure to raise offsetting revenues.

Meanwhile, the House and Senate also approved a 2022 budget resolution that provides reconciliation instructions for a $3.5 trillion spending package. Reconciliation allows for budget-related bills to pass filibuster proof with only a simple majority, meaning that a larger spending bill could potentially pass later this year without any Republican support.

It’s possible for the full package to pass, but we think that is unlikely. With the Senate evenly divided 50-50, this route requires the Democrats to stay completely united. They literally would not be able to lose a single Senate vote. Such a razor thin majority means that we think compromise is likely on many of the key provisions of President Biden’s agenda. Additionally, due to limitations of the budget reconciliation process, bills must be ‘revenue neutral,’ meaning Congress cannot finance the package via the deficit. Paying for most, if not all, of the proposals will require a variety of tax increases, predominately impacting high income individuals and corporations.

The Art of Compromise

Due to the slim majorities, Democrats have already begun to compromise on a couple of President Biden’s initial tax proposals. Here is a summary of where things stand currently on key tax issues, as well as on a few items that seem to already be on hold:

Individual Taxes: Democrats have consistently stated their intention is to avoid raising taxes on families making less than $400,000. Current proposals remain for raising the top marginal income tax rate from 37% to 39.6%, which would apply to income over $452,700 for single and head of household filers and $509,300 for joint filers.

Corporate Taxes: There still appears to be a strong push to raise the corporate tax rate, which was previously lowered from 35% down to 21% in 2017 as part of the Tax Cuts and Jobs Act. Numbers have ranged between 25% to 28%, with the higher number remaining the preferred figure. The Democratic party has declared, however, that they will not raise taxes on small businesses (e.g., family farms).

Investment Taxes: Proposals remain intact to treat long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income above $1 million. If enacted, this would result in a top marginal capital gains tax rate of 43.4%, when including a new top marginal rate of 39.6% and the 3.8% net investment income tax.

Estate Taxes: This may seem like the most cut and dry of impacted areas, although nothing in trust and estate tax law is ever that simple. Nevertheless, current plans call for capital gains taxes at death on unrealized gains above $1 million for individual and $2 million for joint filers.

A Few Items on Hold: Original plans to apply the social security payroll tax on wages above $400,000, to restore the 2009 federal estate and gift tax levels ($3.5 million federal exemption and $1 million lifetime gift limit at a 45% maximum tax rate), and to place a cap itemized deductions for higher earners all appear to be on thin ice at the moment.

As always, we will continue to closely monitor the evolving situation in DC for potential impacts on your financial plan. As these plans come into greater focus, we may make recommendations on a proactive basis to help clients get in front of any potential issues that can impact specific planning goals.

We're always available if you'd like to schedule a call with a member of our team, and in the meantime, you can sign up to have new insights delivered directly to your inbox.

Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.

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