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Important tax strategies for a temporary and non-traditional year-end
First and foremost, we hope that you, your family, and all of your loved ones stay safe and healthy during this incredibly difficult year that was challenging on many different levels. While achieving tax savings is a major financial goal, 2020 has certainly emphasized how secondary or even tertiary an issue can be.
That said, several significant tax laws were passed in the past year – including the SECURE Act, which we wrote about in this article
Attentive and the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which we wrote about here
Attentive). The SECURE Act changed many tax rules related to pension contributions and distributions under an Individual Retirement Account (IRA) or 401 (k), while the CARES Act used numerous tax and other financial provisions to inject cash into a troubled economy to both Businesses as well as businesses support individuals in response to COVID-19.
There is still time to position yourself towards the end of the year to take advantage of the opportunities the new tax laws, including identification and execution, provide before the end of the year to reduce your 2020 tax liability. Our annual tax planning guide is designed to highlight notable tax regulations and potential planning opportunities that should be considered for 2020 and in some cases 2021, both with careful caution and with balance this year.
With an (almost) turbulent election behind us, we will gain more clarity about which tax measures can be implemented in 2021 and beyond. Former Vice President Joe Biden will likely become the 46th President on January 20, 2021, according to recent forecasts from major news outlets awaiting certified results.
With his election, as with any new government, comes the eternal optimism that a new party can make extensive, systematic changes to shape the government’s image. Of course, to make the most ambitious changes, a party would have to control the House, Senate and Presidency, as the Democrats did when they passed the Affordable Care Act in 2010 and the Republicans did when they passed the Tax Cuts and Jobs Act ( TCJA) in 2017. As of this writing, media are predicting that the House of Representatives will continue to be under Democratic control for the 117th Congress from 2021, albeit with a smaller majority than at the 116th Congress. In terms of the Senate, most outlets currently predict that Republicans will control 50 seats compared to the 48 seats held by Democrats. The two remaining seats in the Senate will be decided in a runoff election on January 5, 2021 in Georgia.
In order for the Democrats to gain control of the Senate, they must win both of the available seats in the Georgia Senate. The Democrats will then have to use Vice President-elect Kamala Harris as a tiebreaker. Even in such a scenario, Democrats would have to get support from their entire Senate caucus with no dissidents for a law to pass by a simple majority. We therefore consider it very unlikely that ambitious and robust or even controversial laws will be passed in the near future. Rather, the President and Senate will likely need to reach bipartisan consensus to pass legislation, as Republicans are likely to win at least one seat in Georgia and will therefore retain control of the Senate. With the Houses of Congress divided over political control, the legislation must contain elements attractive to members on either side of the aisle, or at least reasonable concessions to the other side. We believe that with the ever-growing deficit, especially with the trillions of dollars being spent fighting the COVID-19 pandemic, Congress needs to act and may (possibly) need a tax hike to some extent. At this point, we envision incremental rather than sweeping tax changes, as both a divided Congress and a razor-thin controlled congress would, at best, leave the prospect of major tax legislation slim.
For example, Congress has not yet passed a budget resolution for the 2021 financial year. As a result, it is possible that the new Congress could gradually pass tax changes in January under a budget for fiscal 2021, followed by another round of tax changes later in the year when a budget for fiscal 2022 is negotiated.
The ideological differences in the Senate suggest a standstill of at least two years. However, based on the experience of President-elect Biden and Senate Majority Leader McConnell in negotiating with Democrats in the House of Representatives, both sides are capable negotiators and are likely to enforce some laws. However, the process will not be easy or quick and we forecast that the changes will be incremental and slow. Should the Democrats gain control of the Senate in the 2022 election, the tax hikes would likely be quick and substantial, but both scenarios remain uncertain for now.
In addition and unusual, there could be another possibility for tax planning. The longer it takes for tax laws to be passed, the more difficult it usually becomes for the legislature to justify a date that will come into force retroactively to January 1, 2021. Retrospective tax rate increases, while not unprecedented, are relatively rare. There have been six major increases in the tax rate since 1980, and only the increase in the corporate tax rate from 34 percent to 35 percent in 1993 and the individual tax rate from 31 percent to 39.6 percent were retroactive to January 1. The 1993 bill was passed in August and made retroactive to January 1, 1993. In a divided government reinforced by a pandemic, this schedule can be difficult to meet. Interestingly, it took all of 2017 before major tax changes were made, and President Trump and the Republicans made tax reform a top priority.
While tax increases typically don’t take effect until the date a bill is first passed in Congress, it is another planning window for executing tax strategies from early January until the launch of a formal bill in 2021, when tax legislation is successful in 2021 House Ways and Means Committee can exist.
For this reason, we recommend taking the prudent planning approach based on applicable law and revising these plans as needed.
Please log in with us and keep an eye on our warnings, which are posted throughout the year and contain information on tax developments designed to keep you informed of material changes in these environments.
In this Guide to tax planning for the end of 2020 We are created by Duane Morris’ Tax Accounting Group (TAG) and we will walk you through the steps necessary to assess your personal and business tax situation in light of the new laws and to identify actions that are required before the end of the year Reduce your 2020 tax bill.
Disclaimer: This warning is prepared and posted for informational purposes only and is not and should not be construed as legal advice. Please see the company’s full disclaimer for more information.