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The U.S. election of 2020 is over, and the results are now an entry in the history books, but the tax implications are not entirely clear. Nevertheless, your options are somewhat obvious.

Election observers, tax practitioners, and assorted predictors have been monitoring and forecasting the political situation and the resulting tax development possibilities for months. Things would go in one general direction if the Democrats took over the Congress and the White House, and another result would be expected if the Republicans prevailed.

We’ll have a Democratic president, the House of Representatives will continue to be controlled by a (somewhat smaller) Democratic majority, and the Senate will be… well, that’s the big question. We apparently won’t know the answer to that until the results of the Georgia runoffs are available in mid-January. If both of the Republican candidates from Georgia fail to win their election, there will be a 50-50 split in the Senate. In such a situation the Democratic Vice President will be able to cast the deciding vote. Talk about a nail biter.

But there are some things we can be fairly certain will occur. Regardless of the final electoral outcome, income taxes are almost guaranteed to increase. Estate taxes are almost guaranteed to increase. In fact, just about every kind of tax levied by almost every level of government, is poised to increase. The reason is clear – the government needs the money. Largely due to actions taken to counteract the economic pandemic effects, government expenditures have increased, and government tax receipts have decreased.

Payroll withholding taxes, for example, are a significant source of ongoing government revenue. These  funds have significantly decreased because many Americans were laid off or furloughed. Meanwhile, government agencies at all levels have continued to spend. Government officials, whether elected or appointed, have limited ways to deal with constituent issues. Their fallback approach is almost always to throw more money at the situations.

President Ronald Reagan’s quote comes to mind when he said, “We could say the government spends like drunken sailors, but that would be unfair to drunken sailors, because the sailors are spending their own money.”

Here are some of the general Democrat Party tax policy themes:

  • Additional payroll taxes on high earners
  • Increase the marginal rate imposed on high-income individuals
  • Increase the capital gains rate imposed on high-income individuals
  • Tax wealth generally; various ideas include an annual wealth tax & greater estate & gift taxes
  • Increase the corporate income tax rate

As if that list of potential threats was not scary enough, consider the time frame when these expensive changes might come into effect. Congress may have the ability to enact retro-active tax legislation thereby limiting the ability to front-run changes. Because of two U.S. Supreme Court cases, one each from the 1980s and 1990s, it may already be too late to completely dodge the tax bullet.

To illustrate possible changes, Mr. Biden’s tax policy increase proposals for citizens with incomes over $400,000 include:

  • Expand the 12.4% Social Security tax
  • Restore the 39.6% marginal rate
  • Cap the itemized deduction tax benefit to 28%
  • Restore the 3% PEASE limitation
  • Add a new Section 199A Deduction Phaseout

If some of these terms are not familiar to you, please contact me (mfrey@freytaxlaw.com) and I will explain how they might affect your tax liability in the coming years.

Check back next week for a discussion of “Why Tax Planning is Not a Spectator Sport”.