The recent presidential and upcoming Senatorial special elections may have a significant impact on tax law next year (2021) and therefore the need for 2020 year-end tax planning is extraordinarily important.
Some advisors believe that tax reform is unlikely to occur as both incumbent Georgia Senators would need to lose their special elections, scheduled for January 6, 2021. In consideration of potential tax increases in 2021, it is prudent to consider the following provisions of President Elect-Joe Bidens’ tax reform objectives:
- Capital gain rates may be eliminated, taxing all capital gains at ordinary tax rates of 39.6%. While tax harvesting is important every year, this may be a year to discuss the capturing of some capital gains.
- The top tax rate is expected to rise from 37% to 39.6%.
- Corporate income tax rates are expected to rise from 21% to 28%.
- There may be a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 % minimum tax, while possibly still allowing for net operating loss (NOL) and foreign tax credits.
- Biden plans to double the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5% to 21%.
- In addition to doubling the tax rate assessed on GILTI, Biden proposes to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10% of qualified business asset investment (QBAI).
- Biden’s plan offers tax credits to small business for adopting workplace retirement savings plans.
- It would expand several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit.
- Biden’s plan would impose a new 10% surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate tax rate on this activity up to 30.8%.
- The plan proposes to establish an advanceable 10% “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.
- The proposal would equalize the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.
- The plan would eliminate certain real estate industry tax provisions (Section 1031 – Like Kind Exchanges).
- The plan proposes imposing a 12.4% Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
- Biden’s plan caps the tax benefit of itemized deductions to 28% of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28% would face limited itemized deductions.
- The plan phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
- It would eliminate the current estate/gifting exemptions (from over $11 million to potentially $1 million or less).
The above is a partial list of provisions to consider during your year-end tax planning process. Please reach out to RJI CPAs with any questions you may have.