On November 19, 2020, Will Janoush, an associate with our firm, gave a seminar at the Mississippi Society of Certified Public Accountants. Will was asked to present on “The Future of Tax Laws as They Relate to Estate Planning & Business Valuation”. This letter more or less tracks Will’s presentation.
While Will, like most of us, lacks the ability to predict the future and certainly lacked this ability on November 19, he explained that he was waiting for one date in particular, January 5, 2021, to see what would happen in Georgia.
Why Georgia?
As many of you are aware by now, both of Georgia’s senate races were forced to runoffs that took place on January 5, 2021; and, as of January 6, 2021, both seats flipped to the Democratic party, resulting in a 50/50 split in the United States Senate down party lines.
No doubt, many have become familiar with the use of the filibuster in Congress. As such, many people are under the impression that sixty votes are required to pass a piece of legislation in the event one party objects to the same. While this may be true for certain legislation, it is certainly not the case when it comes to tax laws.
Via the Congressional Budget Act of 1974, otherwise known as COBRA, Congress provided that, via a process called budget reconciliation, only a simple majority is needed for policies that affect spending and/or revenues. Tax laws fall squarely within this regime. This process was used for Reagan’s tax cuts, Bush I’s tax increases, Bush II’s tax cuts, and, more recently, the passage of the Affordable Care Act.
You may be asking yourself – “Well, 50/50 is not a simple majority, so how can tax policy pass?”
The answer: Kamala Harris. The Vice President of the United States is afforded the ability to cast a tie breaking vote in the event of a 50/50 split, and there is practically no doubt she would side with her party if given the opportunity. That said, the odds of new tax legislation are now greater than before. As of March, we’re already seeing reconciliation being used to pass additional Covid-19 relief, including Vice President casting a tie-breaking vote.
Proposals for changes to the tax code…
President Biden has made no secret concerning his proposals for changes to the tax code. Among his proposals while on the campaign trail are the following:
Taking the top individual income tax rate back to 39.6% from 37% on incomes in excess of $1,000,000.00;
Repealing the Qualified Business Income (“QBI”) Deduction for certain pass-through entities;
Increasing the capital gains tax rate from 20% to 39.6% for those with incomes in excess of $1,000,000.00;
Eliminating “step-up” in basis for capital gains assets at death;
Capping the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000.00 annually;
Expanding the estate and gift tax by restoring the rate and exemption to 2009 levels (45% and $3.5M, respectively);
Extending 12.4% Social Security tax on wages in excess of $400,000.00; and
Increasing the corporate tax rate to 28% from 21%.
Now, will these proposals actually become law? I do not know – like Mr. Janoush, I also lack a crystal ball. Nonetheless, the proposals are something to consider and likely something to consider now. While Congress has, in the past, passed retroactive tax laws, such actions are highly unpopular politically and, thus, less likely to occur. Assuming any of these proposals should become law this year, they will likely be effective January 1, 2022; but, again, this is not guaranteed.
In light of the foregoing, now may be the time to commence discussing estate, tax, and business planning and start looking at various options. This is especially true if you’re approaching retirement and/or anticipating the sale or transfer of a closely held business. If you’ve received yearly letters from me in the past, then you’re well aware I am of the opinion that these things are not done hastily or at the last second without some detriment.
There are also other issues and concerns that may affect various planning needs and necessitate the need for immediate action. As referenced above, we’re still feeling the effect of the pandemic presently raging across the globe; and, based on the latest developments, these effects will continue to linger, even in light of recent efforts related to vaccinations.
In summation, it may be a good time to assemble your advisors to, at least, explore various options in preparation for what may come, as well as various techniques that can assist with accomplishing your respective goals. Benjamin Franklin once said, “If you fail to plan, you are planning to fail.”
As always, our firm is here to provide competent advice and to assist in any way we can; and we look forward to the opportunity to be of service.
With kindest personal regards, I am,
Very Truly Yours,
Harris H. “Trip” Barnes, III
