It’s 2021. COVID vaccines are being administered, the election is over, the electoral college votes have been certified, and the Georgia runoff has been concluded. We know that Joe Biden is the President, the House is controlled by the Democrats, and the Democrats hold a razor-thin margin that depends on a Vice Presidential tiebreaker and complete loyalty from the Democratic caucus. And it’s time for us, as taxpayers, to take stock and consider what tax reform might look like — because tax reform is most assuredly coming in this age of stimulus spending exceeding $5.4 trillion dollars, a projected $2.26 trillion 2021 budget deficit (not including the most recent $1.9 trillion dollar relief package), and a national debt of $26.9 trillion (as of September 30, 2020).

Possible Tax Reform

During the 2020 Presidential campaign, President Biden offered numerous possible changes to the tax code including:

• Introducing a 12.4% Social Security tax on wages over $400,000.00; the tax would be shared equally by employers and employees

• Increasing the corporate income tax rate to 28% from 21%; recall that prior to the Tax Cuts and Jobs Act, the highest corporate tax rate was 35%

• Increasing the top individual income tax rate to 39.6% for income over $400,000.00

• Increasing the tax rate on long-term capital gains and qualified dividends to 39.6% for income over $1,000,000.00

• Eliminating the basis step-up at death

• Re-introducing the 3% reduction in itemized deductions for income over $400,000.00

• Phasing out the QBI deduction under IRC §199A for income over $400,000.00

• Increasing the estate and gift tax by reverting to 2009 levels, which provided for a $3,500,000 exemption and a maximum rate of 45%; President Biden also suggested that the estate and gift tax would be unlinked so that the lifetime gift tax exemption would be $1,000,000.00, requiring the payment of taxes on total lifetime gifts of more than $1,000,000

Keep an Eye on Washington

This represents a sampling of the tax changes that may come from Washington in the next year or two. Prudence requires constant diligence to keep informed about the discussions and proposals designed to increase revenue so that taxpayers can act before the effective date of such measures. However, taxpayers should keep in mind that there is no legal prohibition against tax measures that apply retroactively. For example, in 2010, Congress passed, and President Obama signed, the Job Creation Act of 2010 on December 17, 2010. Nevertheless, the effective date of most provisions was the first taxable year beginning after December 31, 2009, or in the estate tax context, decedents dying after December 31, 2009. This meant that for some taxpayers, the changes contained in the act went into effect almost a year before the bill became law.