Are taxes ahead under Biden administration?

NOW WHAT?

A look at potential tax law changes under new administration

by Michael J. McCormack, estate & business succession planning specialist, Lincoln Agribusiness Services

Many clients have asked me “Now What”? The 2020 election is finally over. It is time to consider potential key tax law changes that may affect you in 2021 and beyond. Given the election results, many tax and fiscal issues remain uncertain. No doubt, the ultimate make-up of the tax laws will depend on the direction taken by our nation’s leadership (including President-Elect Biden and Congress), either by their ability or inability to agree on tax and fiscal legislation. POST-ELECTION UNCERTAINTY REMAINS

With a new President and Congress coming in 2021, there are many variables and hurdles to overcome regarding any legislation (including tax legislation). As it stands currently, nothing has changed regarding income, estate, gift, generation-skipping transfer, payroll, etc., taxes. When debating budgetary issues, Congress must address projected deficits, anticipated increases in infrastructure spending, projected increases in defense spending, proposed tax increases, funding Social Security and social security and disability insurance, funding Medicare, etc.

With respect to income and estate tax changes, there are several obstacles to overcome. While there may be a focus on potentially raising income and estate taxes, there is not currently a clear path to higher federal taxes. For example, it remains unclear whether there will be a Republican or Democratic Senate majority in 2021, given a couple expected election runoffs in early January 2021. Thus, if the Senate control is not decided until after 2020, year-end tax planning will be difficult because of the uncertainty of the Senate majority in 2021. Ultimately, if the Senate remains in Republican control, most of the existing tax laws may remain in effect at least until the 2022 elections. If the Senate comes under Democratic control in 2021, one should expect income and estate tax law changes to be enacted

Assuming there will be tax law changes, will they be “permanent”? The democratic process in the U.S. is ever changing. Given this dynamic, even if income tax rates increase and the estate tax reverts to a lower exemption amount (as called for by President Biden), the democratic process may cause a return of higher (or lower) income tax rates and estate tax exemptions at just about any time in the future. One only needs to recall 2010, when the estate tax was repealed for one year, as evidence of tax law “permanency.” CONSIDERATIONS GIVEN THE POST-ELECTION UNCERTAINTY

POTENTIAL TAX CHANGES

The chart below includes various tax proposals as set forth in President-Elect Biden’s campaign. If you believe President Biden’s income and/or estate tax campaign proposals will become law in 2021, you might consider the following Income tax rates Generally higher for income in excess of $400.000 actions. ...CONTINUED ON PAGE 46 FICA tax imposed for earned and

Payroll taxes self-employment income in excess of $400,000

Capital gains and qualified dividend income Qualified Business Income deduction Apply ordinary income tax rates for income above $1 million

Repeal

C corporation income taxes

Increase tax rate from 21% to 28%, and provide a “minimum” tax on book profits above $100 million Overhaul tax deductions for Provide a flat credit, instead of a qualified plans deduction, for each dollar saved

Itemized deductions Caps benefit for such deductions at 28% Revert to lower exemptions under previous law that existed prior to the Tax Cuts and Jobs Act, and possibly an increased tax rate

1. Accelerate income recognition to taxable year 2020, where income tax rates may be lower if income tax legislation increase income tax rates. a. Consider year-end bonuses. b. For cash basis professionals, send year-end payment of expenses on or before December 31. c. For those contemplating a Roth conversion, 2020 rates could be lower. d.Maximize retirement contributions (e.g., 401(k) and deductible IRAs). 2. Assuming itemized deductions are otherwise allowable, accelerate income tax deductions to 2020, because income tax deductions may be limited under new legislation. Some items to consider include: a. Itemized deductions (e.g., mortgage interest, state income and property taxes, charitable contributions, etc.). b. Maximize (where appropriate) the use of expensing depreciable property under IRC section 179 (for acquisition of depreciable property in excess of the IRC section 179 deduction).

3. Utilizing tax loss harvesting in 2020 as you would in other taxable years. 4. With respect to estate planning in 2020, utilize gifts of the current $11.58 million (per person) exemption, valuation discounts, non-reciprocal spousal lifetime access GIVEN THE ABOVE POST-ELECTION UNCERTAINTY, FLEXIBILITY IN PLANNING IS CRITICAL

Taken together, the issues raised earlier generally point to at least one absolute. That is, financial, business and estate planning will require constant monitoring and updating.

You should always plan for contingencies with respect to tax planning. There may be (1) higher or lower federal income taxes, (2) modification or elimination of the Affordable Care Act Net Investment Income taxes, (3) modification of transfer taxes (e.g., estate, gift and generation-skipping taxes) and/or (4) unanticipated changes, etc. While tax rates are likely to change, income and/or deductions may be limited or excluded under new legislation. Given the potential changes over the short- and long-terms, traditional financial, estate and tax planning may become a year-round endeavor focusing on flexibility and multiple year planning.

It is tempting to defer financial, estate and tax planning while waiting for President Biden and Congress to act; such a strategy is not recommended. Rather, you should continue your financial, estate and tax planning. A major focus of such planning, however, should be on the flexibility of the plan given the potential tax legislation.

Finally, you and your advisors should consider all facts and circumstances regarding any course of action. In other words, relying solely on a projected tax outcome does not generally result in the optimal financial outcome.

Officially in his new role before the departure of Gov. Gary Herbert, Craig W. Buttars, Commissioner of the Utah Department of Agriculture and Food, will also serve as the head of the deparment under new Gov. Spencer Cox, having most recently served as the Cache County Executive for the past six years.

Early in his married life, Buttars became involved in the Utah Farm Bureau and served there as the State Young Farmers and Ranchers Committee Chairman and later the Cache County Farm Bureau President. These experiences led to an opportunity to run for the state Legislature in 1996, at which time he was elected to represent Utah House District #3. He served in the State Legislature for 10 years, from 1997 to 2006. While in the Legislature, he chaired two House standing committees, the House Government Operations and Natural Resources, Agriculture and Environment. He was a member of the Natural Resources and Environment Appropriations Committee for eight years.

After his legislative service, he was elected to the Cache County Council representing the North District of Cache County. Buttars remained on the County Council from 2008 to 2014. He was elected Cache County Executive in 2014 and has been serving there since 2015.

Buttars has been awarded the Legislative Distinguished Service Award by the Utah Farm Bureau as well as other awards from the Future Farmers of America, Boy Scouts of America and the Richmond Black and White Days.

Buttars is a lifelong resident of Cache County. He attended Ricks College (BYU-I) and Bridgerland Area Vocational Center (Bridgerland Technical College). He spent the majority of his career as a dairy farmer prior to becoming County Executive at which time he sold the dairy operation to his brother and nephew. He lives in Smithfield with his wife Shara. They have three children and nine grandchildren.