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Tax planning considerations: Election results, sunset provisions

According to news outlets, as of this writing, Joe Biden has been named the president-elect of the U.S. Vote counting is still ongoing and election results have not yet been certified, but this news may have some taxpayers wondering what changes if any, they should make in their tax planning to close out an eventful tax year.

The likelihood of a major tax overhaul in the next two years is up in the air as the Senate is not yet decided and may not be until two Georgia run-off elections in January 2021. If Republicans retain the majority, it’s likely there won’t be many changes, but that doesn’t completely lock out any potential adjustments that could come in the next two to four years. Items of agreement on tax policy exist between both parties such as increasing the child tax credit. However, with provisions of the Tax Cuts and Jobs Act (TCJA) set to sunset in 2026, updates to the tax code will be on the horizon by the next election.

In this article, we’ll examine the key points of the President-elect’s tax plan, the sunsetting TCJA provisions, and what to keep in mind as you execute your tax plan to close out the year.

High-level overview of President-elect Biden’s tax plan

President-elect Biden has laid out several of his tax plans the past year on the campaign trail. Here’s what we know based on what he’s shared.

For individuals:

  • Increase the top tax rate on ordinary income for individuals with taxable income over $400,000 to 39.6%
  • Tax long-term capital gains at ordinary income rates for those with taxable income over $1 million
  • Cap the value of itemized deductions at 28% for those with incomes over $400,000
  • Increase the child tax credit to $3,000 for children 6-17 years of age, and increase to $3,600 for children under age 6, make credit fully refundable
  • Increase tax preferences for contributions to 401(k) plans and IRAs for middle-income taxpayers
  • Replace deduction with a refundable tax credit for worker contributions to traditional IRAs and defined-contribution pensions
  • Increase tax benefits for the purchase of long-term care insurance using retirement savings for older Americans
  • Raise eligibility limits on health care premium tax credits and increase the amount of the credit
  • Repeal the per-manufacturer cap on electric vehicle tax credits, make credit permanent, phase out credit for those with income above $250,000
  • Reinstate solar investment credit and tax credits for energy efficiency in residences

For businesses:

  • Phase-out the qualified business income (QBI) deduction for those with income greater than $400,000
  • Expand Social Security tax by increasing the maximum threshold from $137,000 to $400,000 over time
  • Increase the corporate tax rate to 28%
  • Add a 15% minimum tax on “book” income
  • Offer tax credits to offset costs of workplace retirement plans for small businesses
  • Establish a refundable tax credit for companies and nonprofits who provide full health benefits to all workers during a period of work-hour reductions
  • Eliminate certain tax subsidies for oil, gas, and coal production, enhance tax incentives for carbon capture use and storage, establish tax credits and subsidies for low-carbon manufacturing
  • Expand tax deductions for commercial buildings with certain environmentally friendly investments

TCJA provisions to sunset in 2026

In addition to the President-elect’s plans, the TCJA is still in the spotlight. The TCJA was the most significant tax overhaul in decades when it was passed in 2017. However, as is the nature when dealing with budgetary constraints, many of the provisions of the TJCA are scheduled to sunset by 2026. Below we’ve highlighted a few of the anticipated changes.

For businesses, approximately $4 trillion is expected in new taxes over the next 10 years as provisions begin to sunset including changes to:

  • Alternative Minimum Tax (AMT)
  • Elimination or scale back of Section 199
  • Capital gains
  • Payroll taxes
  • Bonus depreciation

For individuals, changes are coming for:

  • Marginal tax rates for upper-income taxpayers
  • Caps on itemized deductions
  • Wealth taxes
  • Childcare/family caregiving
  • Renter’s credits/first time homeowner credit

Considerations for 2020 year-end tax planning

It’s important to note that the above considerations are not an exhaustive list of tax items to review as we close 2020. Work with your CPA to have a proactive plan in place that takes into account various potential scenarios that could manifest in the coming weeks and months. In our follow-up article – 2020 tax planning considerations for businesses, individuals – we’ve laid out some of the key provisions to take into account as you work with your CPA on your end-of-year tax planning.