There has been a lot of talk that taxes are going up. In fact, there are two proposals from the Biden administration in play, the American Jobs Plan and the American Families Plan. Here are some highlights (or lowlights, depending on your perspective):
- Top individual tax bracket will rise from 37% to 39.6%;
- Corporate tax rates will increase from 21% to 28%, with a 15% minimum rate on corporate book income;
- Taxpayers with income over $1 million will have a capital gains tax rate of 43.4%;
- The fully refundable child tax credit will be extended through 2025;
- Estate tax exemptions will decrease, while estate tax rates will increase;
- Step-up in basis on death for appreciated assets will be eliminated with some exceptions;
- Tax deferrals on 1031 exchanges of real estate will end on properties sold for more than $500,000; and
- Social security wage base will increase Increasing for taxpayers earning over $400,000.
There are many more changes in the proposed legislation—these are just some of the big ones.
The Tax Cut and Jobs Act (TCJA) passed in 2017 was very favorable to taxpayers, particularly those in the real estate investment arena. The current proposed legislation will undo a lot of the favorable provisions from the TCJA, and seems to target real estate investors more so than other fields.
Will this legislation pass?
In all likelihood, some of the provisions will pass and some will not. Almost all legislation will change in some fashion before becoming law, and that holds true even more so for changes in tax laws. Currently, the Democrats hold a slim majority in the House of Representatives, and the Senate is split 50-50. So if legislation gets passed along party lines, it will require Vice President Harris to break the tie in the Senate. While this could conceivably happen, if just one Senate Democrat votes against the changes, the party line vote fails. Several Democrats in Congress have already indicated that they want to see the state and local tax cap on deductions (SALT cap) that was imposed in the TCJA lifted. In addition, there are a number of Senators who will be up for election in 2022 and those campaigns are already under way. Voting on a tax increase during a contested campaign could be costly in a close election, therefore, a party line vote on tax increases is not a certainty. As an example of the difficulty with party line votes, Senator Joe Manchin, a Democrat from West Virginia, received media coverage for his stance of opposing the sweeping bill regarding voting rights, which was already facing an uphill battle. This doesn’t take into account the Republicans’ ability to filibuster, which would force 60 Senators to approve the legislation.
When will the legislation pass?
The Trump administration had Republicans in control of both the House and the Senate during his first two years in office. Nonetheless, the TCJA didn’t get passed immediately; it came late in 2017. Similarly, we should anticipate that the Biden administration will work on passing tax legislation later in 2021 or early 2022, well before the 2022 midterms. A compromise package is likely to be negotiated later in 2021.
In anticipation of the passage of new tax laws, it may be appropriate to accelerate income into 2021 while rates are lower and to defer expenses into 2022. On the estate tax side, consider making significant gifts before the exemptions are lowered. A gifting program is almost always beneficial from a tax perspective, and that is even more true this year.
Chuhak & Tecson attorneys will be monitoring the pending legislation so we can provide updates when more clarity is available.
Client alert authored by Mitchell D. Weinstein (312 855 4608), President, Chuhak & Tecson, P.C.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
