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New Administration – Tax Planning Considerations and Reality Check

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With the change to the Biden Administration and a Democrat majority in Congress, many are wondering about potential tax changes and potential tax increases. However, there are many competing priorities for the incoming administration. With an additional stimulus agenda and infrastructure bill high on the President-Elect’s to-do list, a tax bill will most likely take a backseat. 2021 will be likely be hard year for big tax changes, as the economy’s recovery from COVID is the front running issue. However, if a tax reform bill is introduced to Congress soon, any tax reform bills will likely be prospective, not retroactive. These changes to the tax law will probably not affect the 2020 tax year and potentially even the 2021 tax year. Do not panic, we have time to plan accordingly!

How a Bill Becomes a Law

There are many steps before a bill becomes a law. Even with a majority in both the House and the Senate, it could still take some time before any law goes into effect, it could take longer than you think.

  • Drafting the Bill
    • Any member of Congress who has an idea for a law can draft a bill. Although the president cannot propose a bill, he can express his support for certain legislation to be brought to Congress.
  • Introduction to Congress
    • Once the bill is drafted, it must be introduced to Congress. Under the Democrat majority, it would not matter which side of Congress is selected.
  • Referral to Committee
    • Once a bill is introduced, it is referred to a committee. Once in committee, the bill is examined and the chances of passage by the entire Congress are determined. The committee can choose to hold hearings. These hearings allow the views of both proponents and opponents to be on record.
  • Subcommittee Review
    • Subcommittees are then organized. Committees refer bills to a subcommittee for further study and their own hearings. The subcommittee may make changes to the bill. A vote is required to refer a bill back to the full committee.
  • Committee Markup
    • When the hearings and subcommittee review are completed, the committee will meet to amend and update the original bill before recommending the bill to the floor.
  • Full Chamber Vote
    • Once the bill reaches the floor, there is additional debate and members of the full chamber vote to approve any amendments. The bill is then passed or defeated by the members voting.
  • Second Chamber of Congress Receives Bill
    • Depending on what chamber of Congress the bill was introduced in, the preceding 5 steps will repeat in the other chamber. The second chamber has many options with how they are to proceed with the bill. Congress can form a conference committee to resolve or reconcile the differences between the House and Senate versions of a bill. If the committee comes to an agreement, a conference report will be issues with final bill recommendations. If the committee fails to reach an agreement, the bill will die. Both the House and Senate must vote to approve an identical bill before it goes to the President.
  • President Approval or Veto
    • After both the House and Senate have approved an identical bill, the bill is sent to the President for approval. If the President approves of the legislation, he will sign the bill and it becomes law.

Budget Reconciliation Process

Reconciliation is a special process that makes it easier for legislation to pass through the Senate. In the Senate, a reconciliation bill is considered under expedited procedures that limit both debate and amendments. There are limitations on what can be included in the reconciliation bill. However, a simple 60-vote majority in the Senate can override those limitations.

Budget Reconciliation was integral in passing the 2017 Tax Cuts and Jobs Act as Republicans used reconciliation to enact their tax law. This is the main reason that the many provisions of the 2017 tax reform sunset after 10 years. The use of reconciliation cannot increase the national deficit beyond the 10-year budget window and must have a direct and non-incidental impact on the government’s finances. This could be an option for the Biden administration to use to pass his tax agenda, especially since the Congress did not pass a budget last year.

Estate Planning Considerations

There are a few notable changes for estate planning considerations. The biggest change is the potential reduction of the estate tax exemption. The Biden administration has not specifically announced what they plan for the reduced exemption amount, but we should expect it to decrease significantly. Some democrats have thrown out an exemption of $3,500,000. This would reduce the amount of free gifting that a taxpayer would have and would decrease the amount of the tax-free estate. Absent any new changes to the lifetime estate and gift tax exemption amount, the current $11,700,000 exemption amount will sunset in 2025 to $5,850,000. It would be advantageous to make larger lifetime gifts before the sunset provision and before any changes made by the Biden administration. Another big change is the removal of the step-up basis provision at the date of death for the surviving spouse. In our current real estate market, house prices have never been higher and are raising with every new home sale. Unless a home was purchased in this recent market, the value has increased significantly with the basis remaining constant. The increased value will increase the overall estate, but will also lead to significant capital gains for the surviving spouse if they were to sell. While Biden’s plan has suggested no basis step-up for inherited property, there has been a proposal suggesting an annual exclusion per person indexed for inflation on inherited capital gains property and a long-standing homeowner’s exclusion for an inherited primary residence. We have a network of estate planning lawyers that we can refer you to if you want to start the estate planning process. Locking in your planning before the end of 2021 will help to alleviate your concerns and cover you for the potential changes.

BP Insight

While retroactive changes to tax rules and rates is unlikely, it has happened in the past.  In the Tax Reform Act of 1993 (TRA of 93), Clinton passed a retroactive bill in August of 1993 that made changes to both the income tax and estate tax retroactive to January 1, 1993. The bill was contested for constitutionality, but the Supreme Court upheld the retroactive status.

We will continue to provide updates as additional information is released.

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