The President can influence tax legislation, but he does not write tax legislation – only the House Ways and Means and Senate Finance Committees can write tax legislation. The President has the power to sign legislation that has been approved by both houses of Congress. Thus, if the Republicans retain control of the Senate, then major tax increases are unlikely. If the Democrats win control of the Senate, then large-scale tax increases are likely, at least if President-elect Biden’s tax proposals are taken up by his party.
As of this writing, the Democrats have retained control of the House of Representatives, though with a slimmer majority than before the election, and control of the Senate is still up in the air. Each party has 48 seats. Two of the four undecided seats are in Alaska and in North Carolina, and the election results are both leaning Republican, though votes are still being counted. The remaining two undecided seats are in Georgia and they are heading to a runoff election this coming January. Democrats are unlikely to win the runoff elections in historically-Republican Georgia, but that is their clearest path to control of the Senate. Note, if they do prevail in Georgia, they would have only 50 Senate seats, but they would have effective control of the Senate because Vice President-elect Harris can cast the tie-breaking vote.
Without Democratic control of the Senate, there would be a divided Congress and President-elect Biden would likely have a center-left presidency. In this scenario, the more progressive wing of his party would be unable to push through large tax increases and some of its more progressive policy items (e.g., healthcare and climate change). President-elect Biden would be expected to pursue more executive orders and regulatory change.
Even if President-elect Biden is able to advance tax increases, his stated goal is not to increase taxes on the middle class. For example, he proposes to increase the corporate tax rate from 21% to 28%, and the maximum individual tax rate from 37% to 39.6%, but only for individuals earning more than $400,000 per year. Also applicable to individuals earning more than $400,000 per year, President-elect Biden would phase out certain itemized deductions, phase out the qualified business income deduction for owners of pass-through businesses, repeal the §1031 like-kind exchange rules, limit the ability to use certain real estate losses, and subject wages over $400,000 to the 6.2% Social Security portion of FICA (presently this employment tax is limited to the first $137,700 of income). Other proposed tax increases, such as increasing the rate of tax applicable to long-term capital gain and qualified dividend income from 20% to 39.6%, would apply only to individuals earning more than $1,000,000 per year.
Traditional year-end tax planning involves deferring income and accelerating expenses. This year, it also includes an election-year component depending on one’s expectation of tax changes that may be on the horizon.
Withum is releasing its year-end tax planning guide later this week and it will contain individual and business tax planning tips, new opportunities under the CARES Act, and top planning considerations for specific industries. Please consult with your Withum advisor for advice tailored to your particular situation.
Author: Daniel Mayo, Principal, JD, LLM, National Lead, Federal Tax Policy | firstname.lastname@example.org