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Into the Unknown - Five Key Takeaways from Our Tax Panel

Into the Unknown - Five Key Takeaways from Our Tax Panel

The election is over, the year is coming to a close, and accountants everywhere are doing their best to predict what our economy will look like in the coming years. Income tax, estate tax, corporate and personal tax brackets (and their impact on individuals and businesses) – no matter what the future holds for our national tax system, it’s important to understand what these areas could mean for our economy, our clients, and our own personal financial plans.

At last month’s Moore North America Virtual Conference, we hosted a tax panel of some of the top professionals in the industry to discuss the effect the US general election may have on the economy. Joe Buble from Citrin Cooperman, Hans Gustafsson from HCVT, and David Brauer from Lurie provided insights into the immediate aftermath and some things to keep in mind as we project and plan for 2021. Here are five key takeaways from that session.
  1. A change in power does not necessarily mean an immediate change in tax law.
    Transitioning from President Trump to President-Elect Biden in the White House may feel dramatic, but an understanding of how tax laws get passed would remind us that changes in legislation take a fair deal longer to come to fruition.

    While President-Elect Biden has several proposed tax plans, and ultimately has the final say in whether or not they become law, they have a long way to go before reaching his stamp of approval (or veto). The House, of which Democrats have retained control, is where bills start their journey to become law. After which, they are sent along to the Senate, the power of which is in the hands of a run-off election in Georgia to be held in early January.

    It’s fair to say that the path ahead of us is one filled with uncertainty, compromise and debate, which brings us to our second key takeaway: realistic timing.
     
  2. Any proposed tax increases are not likely to happen right away.
    Many clients have expressed concern that tax rates may increase as early as January 1, 2021 under the new administration. While we expect that tax rates will eventually increase, we feel that this is unlikely to happen that soon. Not only is the country still suffering from the economic impact of the pandemic, but the Democrats did not gain the number of seats in the House and Senate as some expected. Even if the Georgia Senate runoff ends up giving the Democrats narrow control of the Senate, it may still be difficult for the Biden administration to implement its ambitious tax increases with only a narrow majority. Tax increases are never popular, and many politicians are already starting to think about the mid-term elections in 2022.  

    Clients understandably have many questions about these potential tax changes and what they should do now. It is therefore critical that we explain the likely timing of any tax changes and also discuss how they may be impacted if the various proposed changes are enacted. Since this is a very fluid and uncertain situation, we should keep clients informed of legislative updates and consider the tax impact of various potential legislative scenarios.

    So, work with your clients to plan for all scenarios, and in the meantime, there are three areas worth focusing on, especially at yearend: estate planning, PPP loans, and charitable giving.
     
  3. A change may be coming for estate planning and gifting.
    A notable tax proposal is to reduce the current $11.58M lifetime gift exclusion ($11.7M in 2021) to either $5M or $3M per person, and to eliminate the “basis step-up” on death. Note that even if no action is taken, the current higher exclusion is set to sunset after 2025 and return to $5M.
    High net worth individuals should consider utilizing the higher exclusion limit before it expires. Additionally, current economic conditions may have lowered the valuations of certain assets which may now make it a particularly attractive time to gift certain assets.
 
  1. PPP Loans – “Hurry up. Wait. Give guidance later.”
    Paycheck Protection Program (PPP) loans were introduced via the CARES Act in April, and were meant to help struggling businesses pay employees, cover rent, etc. If you followed the rules set forth for the loan, the forgiveness of the loan would be tax exempt.

    Fast forward to May and the IRS issues Notice 2020-32 stating their position on tax-exempt income, including that expenses the income is used for should not be deductible. In response, a bi-partisan letter was issued from members of Congress saying IRS was wrong and their position is against the original intent of the CARES Act.

    So who is right here? Does the congressional letter trump the IRS notice? Some are looking to delay forgiveness to 2021 and hope that Congress passes legislative correction to this matter.

    Stay tuned for more information as this matter develops.
     
  2. Give smarter during this charitable time of year.
    Year-end is often associated with charitable donations, and this December is no different. However, as we look to potential trends and tax proposals in the coming years, there are certainly a few options to consider that could help you give smarter.

    For clients with charitable giving goals, it is generally more tax efficient to donate long-term highly appreciated stock instead of donating cash. If the Biden administration eventually implements its proposal to tax long term capital gains at ordinary income tax rates, this strategy may become even more relevant.  
     
David-Brauer.PNG David Brauer, dbrauer@luriellp.com
Partner, Lurie
Joe-Buble-Headshot.jpg Joe Buble, joeb@citrincooperman.com
Partner, Citrin Cooperman
Hans-Headshot.jpg Hans Gustafsson, hans.gustafsson@hcvt.com
Partner, HCVT