After the unprecedented year that was 2020, many are looking for signs of a brighter 2021 and financial opportunities that may lie ahead.
But there is one constant theme that cuts across both years: change. And with a shift in political control over the executive and legislative branches, significant federal income tax modifications may be on the way for individuals and businesses.
Although no tax proposals are formally on the table, there is every reason to believe that changes may be in store.
Tax adjustments can be complicated. Here, we address considerations that offer a glimpse at the changes that may be on the way. Because many other modifications are being considered—and several factors can impact planning—business leaders should contact their tax advisers and discuss potential revisions and other items that may affect their financial futures. To help guide those conversations, here are three likely candidates for change if tax reform becomes a reality.
1. Increased Tax Rates. President Biden has indicated a desire for Congress to increase the top marginal income tax rate and the corporate tax rate. If you fall above the $400,000 income level, you may be particularly impacted by potential tax legislation. If that happens, it is unclear whether the proposed rate changes will be applied prospectively or retroactively. If increased rates apply prospectively, it might be best to accelerate income this year while deferring deductions to years with higher tax rates. If tax rate changes apply retroactively, take measures to increase deductions this year.
2. Phasing Out Deductions. The new administration may eliminate the Qualified Business Income Deduction for families with incomes over $400,000. Since its enactment in 2017, this deduction has reduced taxation on qualified income items on partnerships, certain LLCs, and corporations. If you receive a significant share of your annual taxable income from interests in pass-through entities, the proposed changes could have a notable impact that may be magnified by the potential for increased rates discussed above.
3. Eliminating Capital Gains Rates. Under a recent proposal, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates for income above the $1 million threshold. If rates rise in 2022, selling appreciated assets and realizing a profit this year—then reinvesting the proceeds— may take advantage of lower tax rates and reduce the tax applicable to future gains. Assets that have decreased in value may be better held and sold later when tax rates are higher.
Brady Cox is an associate at Jackson Walker, and Jason Freeman is a founding partner and managing member at Freeman Law.