General Predictions for Tax Changes

Unless you have just arrived from a 2 month trip to the moon, you know that the Democrats retained control of the House and gained control of the White House and the Senate. ‘Change’ is the operative word these days. We could experience big changes in tax rates and regulations in the next two years. If control of the House or Senate changes in 2022, balance may be restored then, but until then, hold on. The expected changes are no secret. Biden announced the changes before the election, so we all have a good idea of what is likely to happen. Some of the more significant and likely changes include:

• Elimination of the long term capital gains rate (potential increase of approximately 20%)
• Increase in individual rates to the highest rates pre- Tax Cuts and Jobs Act (TCJA) enacted in 2017 (potential increase of 2% to 3%)
• Increase corporate tax rate from 21% to 28%
• Estate and gift tax – roll back the credit to pre-TCJA amount of $5 million

The following article has a more complete list and description of potential tax changes under the Biden administration.  

Changes that Impact Decisions

Buy and sell decisions should take into consideration changes in tax rates. It may make sense to accelerate or slow down sell decisions, like selling a business. Think about it. Selling a business for $1.0 million will result in a long-term capital gains tax of approximately $200,000 under the 2020 tax rates and possibly $400,000 under the proposed 2021 tax rates. That’s a significant difference and may change the decision of when to sell. Not many people like to pay taxes, regardless of rates, even when they were relatively low in 2019 and 2020. We may long for those lower rates in the near future. Although the long-term capital gains rate change will be significant, it pales in comparison to the drastic changes that could happen to the gift and estate tax credit. In a recent interview with Rick Kahler, CFP, he discusses his expectations for changes with the Biden administration and the impact to buying and selling decisions. Careful planning, timing of transactions and risk evaluation should always be exercised with investment decisions.

Other Changes

Another position taken by the Biden administration is a Federally mandated $15/hour minimum wage. We will have future articles on this measure and the impact to businesses and the communities or States that have adopted similar legislation in the past. Stay alert, adapt and stay tuned to this channel.