Tax policy for the next two years, and therefore tax planning strategies, may be determined in Georgia early next year.
On Jan. 5, 2021, the state will hold runoff elections for two Senate seats, which may determine whether Republicans retain control of the Senate or whether Democrats will have a trifecta — control of the White House and both Houses of Congress. With their late Senate victories in Alaska and North Carolina, the Republicans will hold 50 seats in the Senate on Jan. 1, 2021.
“The Republicans only need to win one of the two runoffs in Georgia in January to retain control of the Senate,” said Roger Harris, president of Padgett Business Services and a native of Georgia. “My sense is that they will win at least one of the two runoffs in January 2021. Without that, the Democrats would have effective control of the Senate with the tie-breaking vote of the vice president.”
This puts a crimp in a lot of year-end moves, according to Harris. “It comes down to a game of ‘wait-and-see,’” he said. “A lot depends on how those runoffs come out. The power structure will change if the Democrats get one or both of those seats, and there could be significant change. But if the Republicans hold the Senate, it’s unlikely that we’ll see anything dramatic like the Tax Cuts and Jobs Act or any big tax bill. The Republicans will have more seats in the House now, so the Democrats would have to be almost 100 percent united to get anything out of the House.”
So corporate tax rates will likely stay the same, with no major tax legislation on the horizon, Harris predicted. “If the Senate says in Republican hands, the House will have to find tax things that both parties agree on, so there might be some tradeoffs. It’s possible there could be a little raise in the corporate rate if the Democrats give the Republicans something they want.”
Harris’s advice: “Do your planning based on the current law, but be prepared if either during the lame duck session or immediately in January we get a stimulus bill that tweaks the tax law. And if the Democrats win both Senate seats in Georgia, they might want to push through something right away, so be prepared to adjust if something changes.”
The danger would be to assume that all the proposed changes will happen and to plan based on that, according to Harris. “The key will be to see how the Senate turns out.”
Tom Wheelwright, CPA, president of accounting firm WealthAbility, agreed. “From a federal tax standpoint, there will be no huge changes. They will figure out how to pay for things and might make slight changes. The good news is we won’t see a change in the corporate rate, so that will continue to generate interest from foreign companies to relocate to the U.S.”
At the state level
Wheelwright saw some positive developments in state taxation as a result of the election, with the one negative being the apparent passage of Arizona’s Proposition 208.
“Proposition 208 is a constitutional amendment which imposes a 3.5 percent on income over $250,000 in addition to the existing income tax. The proceeds would go directly to school districts without any legislative oversight. The legislature can’t do anything about it — it will take another proposition or a court challenge to change this. You’ll soon see Taj Mahal buildings and supervisors with salaries of half a million.”
But there’s better news for taxpayers out of Illinois and California, Wheelwright suggested. “Both states had important tax measures on the ballot,” he said. “In Illinois, a proposal to move to a graduated rate from a flat rate was defeated. In California, the effort to overturn Proposition 13, which held down property taxes, was also defeated. Both results are good news for taxpayers.”
The opportunity to make fourth-quarter adjustments as part of a tax strategy depends on the ultimate outcome of the Senate races, concurred Jared Feldman, partner-in-charge of the Private Client Group at Top 100 Firm Anchin. “There are opportunities here and decisions to make depending on where this falls,” he said. “If there is a Democrat in the White House and the Democrats control both houses of Congress, a lot more change lies ahead. A split Congress will make it more challenging to enact change.”
“Biden has talked about increasing the top rate for ordinary income back to 39.6 percent. He would also make changes to FICA. The current maximum subject to FICA is $137,700 — anything above that is not subject to Social Security tax. Under Biden’s plan, the tax would kick back in at incomes above $400,000. This would have a dramatic effect on taxpayers,” said Feldman.
Also on the horizon might be the elimination of the $10,000 SALT cap, according to Feldman. “This would affect a lot of high-net-worth taxpayers in a lot of high-tax jurisdictions,” he said. “This might be high on Biden’s wish list, but with a split Congress it will be an uphill challenge. There’s just a lot of uncertainty right now.”
“Biden would raise the corporate tax rate to 28 percent, and he has also suggested implementing an offshore profit tax,” Feldman noted. The real estate industry would benefit from Biden’s proposal for a new refundable advanceable to assist home purchases for first-time home buyers, he observed: “This would be refunded at the time of the purchase, rather than as a normal credit.”
“Last but not least is the estate tax,” Feldman said. “This is really a popular topic among the high-net-worth community. The lifetime exemption, now scheduled to go to $11.7 million in 2021, will revert back to $5.8 million in 2025. Biden has talked about reducing the exemption earlier than 2025, so advisors should think about planning opportunities to take advantage of the current exemption.”
“These are all things to think about as we get more clarity as to the shape of government,” he said. “A split Congress tempers a lot of things, so it won’t be anybody’s dream list of what they want done. There will be a lot of negotiating and give-and-take.”
“There’s a possibility of some things in a stimulus package, but other than that there won’t be much in the way of tax legislation if there’s a divided Congress, agreed Bill Smith, managing director of the National Tax Office of Top 100 Firm CBIZ. “For example, we might get some extenders extended. With a divided Congress, it probably means that [Senate Majority Leader] Mitch McConnell keeps his job. And he is adamant about blocking things that don’t fit the Republican agenda. It would be unlikely to get a stimulus bill passed during a lame duck session because Republicans don’t want to raise the deficit.”
