Assessing 2020 Election Results on Tax Policy
January 19, 2021
The following piece is not intended to be a political commentary, nor an endorsement of either presidential candidate or their respective agendas. The information below is intended to provide general perspective based on a number of sources and experts. To discuss your specific circumstances, please contact a member of Cape Cod 5’s Wealth Management team.
The 2020 presidential and congressional elections are now over, and Joe Biden will be inaugurated as president on January 20, 2021. Democrats remain in control of the House, albeit with a narrower margin, and control of the Senate has finally been decided, with the Democrats winning both Senate seats in Georgia. The Senate is now split evenly with 50 Democrats and 50 Republicans, and as the vice president Kamala Harris casts the final vote in a tie, Democrats will control the chamber. This means that, for the first time since 2011, the Democrats will control the House, the Senate and the White House.
What does Democrat control mean for future tax changes?
Before evaluating the chances of passing significant changes to tax policy, and any subsequent recommendations based on these changes, it might be helpful to look at the most significant tax policy proposals on which President-elect Biden campaigned:
Increasing federal income tax rates for families earning more than $400,000
Long-term capital gains and qualified dividend rate on those earning over $1 million increasing from 20% to 39.6%
Ending the “step-up” in cost basis of assets at death
Applying the Canadian approach to taxing asset appreciation at death at capital gains rates
Accelerating the sunsetting of the Tax Cuts and Jobs Act (TCJA), which would in part, increase tax rates, reduce the federal estate tax exemption and standard deduction, and eliminate the deduction limit on SALT (State and Local Tax) deductions
Increasing of corporate tax rate from 21% to 28%
Will these proposals be enacted?
With full Democrat control there is a strong chance that many of President Biden’s proposals will be considered and put to a vote. However, those who fear that all of the proposals will become law should take heart – Democrats narrowly control both the House and the Senate and will need every single vote to make any changes to existing tax policy. Thus, they will undoubtedly have to make concessions to see their proposals pass through both legislative bodies and become law.
Most likely we will see increases in both personal income and long-term capital gains tax rates for those with high incomes. Hopefully, this will come with the offsetting benefit of higher limits on the deductibility of state and local taxes. Corporate tax rates may increase but substantial hikes could encounter resistance from many Democrats.
What tax change would most impact our area?
Due to the recent increases in real estate values on the Cape, Islands and Southeastern Massachusetts, the possible change that would have the greatest effect would be the end of the “step-up” in basis of assets at death. At death, any asset of the deceased would be taxed based on the difference between the cost basis of the asset and its market value. The tax would be paid by the deceased’s estate. This would affect even those Massachusetts residents who in the past had no estate tax bill at death. Currently, for example, if a widow died and owned a home with a cost basis of $100,000 that was worth $700,000, and an additional $100,000 in savings, she would have an estate valued at $800,000. Her beneficiaries would not owe Federal or Massachusetts estate taxes under current tax laws. The proposed tax changes would result in her beneficiaries owing tax on $600,000, the difference between the cost basis and the market value of the house. The resulting estate tax may be $100,000 or more. A family home might have to be sold to pay the tax bill.
What steps can you take now to help minimize the impact of future tax changes?
For those expecting to be in higher income tax brackets in the future, it might make sense to work with your financial advisor and CPA to consider strategies that would accelerate both the realization of capital gains and ordinary income. Strategies might include a Roth IRA conversion or the sale of highly appreciated assets. For those most concerned with the end of the “step-up” in basis, it might make sense to accelerate gifting strategies or to employ the use of trusts to minimize future tax impact.
Cape Cod 5’s Wealth Management group will continue to monitor conditions, outcomes and their potential impacts as we move forward. As always, please call us with any questions at 877-409-5600.
These facts and opinions are provided by the Cape Cod Five Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.