President-elect Joe Biden will take office on January 20 and the new Congress will convene on January 3. President-elect Biden has stated he wants to raise taxes on high-income households and corporations. For corporations, he would propose an increase in the federal tax rate from 21% to 28%. Further, corporations would be subject to a new minimum tax and increased taxes on foreign income. For high net worth individuals, the new administration would propose an increase in the top tax rate to 39.6% from 37%, create new limits on deductions, and impose the 12.4% Social Security payroll tax on wages above $400,000. Capital gains currently taxed at 23.8% would be taxed at 39.6% for taxpayers with over $1,000,000 of income.
Higher income owners of pass-through businesses such as S-corporations and partnerships would lose the benefit of the 20% Qualified Business Income deduction.
How likely is a federal tax law change in 2021? For the new administration to implement their proposed tax law changes they will need to get a tax bill through Congress. Many tax advisors would say it is not very likely that a tax bill will get through the Senate in 2021, so the chance of a significant change in federal tax rates in 2021 may be remote.
The Democrats kept their majority in the House. The new administration may have to work with a Republican Senate Majority (at the date of this writing that is pending the results of the Georgia runoff elections). Even if the Democrats control the Senate by a simple majority, there are still other hurdles that they would need to overcome to get a tax bill passed. One such hurdle is the Senate filibuster rule. As a general rule, 60 votes are required to pass legislation that is being filibustered in the Senate. The Democrats will not control 60 seats in the Senate. Further, some would argue that the proposed tax increases may not be supported by all the senators whose votes would be crucial for passage. Some of the Senate that supports the tax increases may prefer to implement them once the economy has stabilized.
In 2021, the Democratic House will have to navigate various other tax policy issues. Another round of economic relief and upcoming tax provisions that were put in place as part of the 2017 Tax Cuts and Jobs Act (TCJA) that will expire over the next six years will likely have to be addressed in conjunction with a proposed tax bill. The TCJA’s individual income tax provisions are scheduled to expire at the end of 2025, along with the phaseout of several business tax provisions between 2021 and 2026 unless Congress acts. These “sunsetting” provisions of the TCJA will likely be at the forefront of tax policy discussion in the coming year. All of these issues will require debate and negotiation, which takes time and makes the prospect of a significant tax law change in 2021 less likely.
Although Congress can and has enacted tax legislation retroactively, it would appear unlikely that a significant tax law change retroactive to January 1 would be enacted in 2021. Historically, it is more commonplace for tax law changes to be effective prospectively so that taxpayers can plan for the change and the policy changes can be incorporated into IRS forms and software, etc.
So for now, it appears that the chances of significant federal tax law change in 2021 may be remote. That may not be the case in subsequent years, though. Rest assured that discussions around federal tax law changes will continue to be in the forefront in 2021 and subsequent years.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.