A political power change from the 2020 election in favor of the Democratic Party could be followed by sweeping legislative changes in 2021 impacting high-income and high-net-worth taxpayers in the form of higher income and transfer tax rates and/or severe limitations on, or eliminations of, many common estate planning techniques currently available. The possibility of such changes creates heightened planning considerations for the remainder of 2020:
- The effective date for certain tax law changes could be retroactive to January 1, 2021.1
- Many sophisticated income and transfer tax planning techniques may require several steps, weeks or months’ worth of time to properly implement to minimize certain tax and legal risks.
- Many financial, tax, legal and valuation professionals, whose guidance and services may be needed to facilitate certain income and transfer tax planning strategies, may be experiencing increased demand for their services by their clients in anticipation of post-election results, which could add more time to the planning process.
- High-net-worth and high-income individuals must begin talking with their advisors and taking action immediately to be in a position to execute certain planning strategies by year-end 2020 and take advantage of current income and transfer tax planning opportunities before they possibly disappear.
- Regardless of any 2021 legislative changes, the growing amount of Government debt and deficit spending that may eventually necessitate raising revenue through taxes combined with the temporarily high transfer tax exemptions that will get cut in half on 1/1/2026 under current law may make many related planning techniques and decisions beneficial to consider now anyway.
Below are highlights from the tax proposals of President Trump vs. Presidential Candidate Biden that primarily affect high-income and high-net-worth individuals and businesses. Democrats would have to keep control of the House of Representatives, win the Presidency and control of the Senate for Biden’s proposals to have a chance of becoming law.
Select Highlights from President Trump’s vs. Candidate Biden’s Tax Policy Proposals (Not an Exhaustive List)2
General themes of Biden’s and the Democratic Party’s general tax policy proposals include:
- Increase tax on income for high-income earners through increasing payroll and self-employment taxes, raising the top marginal income tax rate as well as the top capital gains income tax rate or limiting itemized deductions.
- Increase tax on wealth for high-net-worth individuals through a wealth tax, increasing estate and gift taxes, eliminating the step-up in basis at death for capital assets or limiting various estate planning techniques.
- Increase tax on businesses through increasing corporate income taxes or limiting or eliminating certain deductions.
The end of the year is fast approaching and many financial, tax, legal and valuation professionals may be stretched thin to keep up with increased demand for their services leading up to the election. Procrastination may leave insufficient time to address all the requirements and action items needed to properly implement various income and transfer tax strategies by year-end. High-income and high-net-worth individuals must consult with their advisors immediately to begin taking what steps are needed to be in a position to capitalize on various opportunities that may disappear after this year if there is a sweeping political power change at the federal level from the 2020 election. The time to act is now!
1 Retroactive tax legislation is possible if supported by a rational legislative purpose. See Pension Benefit Guar. Corp. v. R. A. Gray & Co., 467 U.S. 717; United States v. Carlton, 512 U.S. 26; and Quarty v. United States, 170 F.3d 961.
2 Sources: Trump, Biden Tax Plan Comparison by Bloomberg Tax & Accounting, The Bureau of National Affairs, Inc., 2020. Year-End Planning in 2020: Including Planning for a Biden Administration by Robert Keebler, Keebler Tax & Wealth Education, 2020.