As the Tax Cuts and Jobs Act of 2017 (TCJA) sunset provisions (generally 12/31/2025) get closer every day, many tax and fiscal issues remain uncertain. Today, it appears that tax legislation may be in the offing once again. In fact, President Biden’s infrastructure plan includes a 28% corporate tax rate among other corporate and individual tax increases. In addition, Senator Sanders (I-VT) has introduced legislation to make the estate tax progressive, as we have seen proposed earlier in 2021. Further, Senator Van Hollen (D-MD) and others have set forth proposals to substantially eliminate or reduce the stepped-up basis rules applicable at an individual’s death.
To complicate matters, on September 13, 2021 another set of legislative tax proposals was released by House Ways and Means Committee Chair Richard Neal (D-MA). No doubt, the ultimate make-up of the tax laws will depend on the direction taken by our nation’s leadership (including President Biden and Congress), either by their ability or inability to agree on tax and fiscal legislation.
Given the above uncertainty, flexibility in planning is critical
Considering the ever-changing political environment, taxpayers and their advisors need to plan for many contingencies with respect to tax planning. For example, 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), (4) some entirely new tax laws (e.g., regarding ROTH limitations), and/or (5) unanticipated changes, etc. Because of the current state of politics, clients and advisors need to understand the potential outcomes under higher, lower, or similar tax rates. 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.
What is currently known?
Currently, the only provisions that we know about for certain are the TCJA sunset provisions. Relying on any one proposal in its current form, could result in negative outcomes. As always, it is critical that flexibility be incorporated into any financial and estate plan. Advisors and their clients should consider all facts and circumstances (e.g., market and company risk, time horizons, low interest rates, tax issues, geopolitical risks, etc.), regarding any course of action. In other words, relying solely on a projected tax outcome does not generally result in the optimal financial outcome. Finally, the uncertainty surrounding any tax proposals should not inhibit planning from going forward.
Why financial and estate planning should continue
One may query, should financial and estate planning be deferred? The resounding answer is no! Clearly, planning should continue for many non-tax and tax reasons. Non-tax reasons such as, assuring that your goals and objectives are incorporated in legal documents, property titling, beneficiary designations, etc. With respect to tax reasons, there may be effective dates that are prospective (e.g., after 2021), no one knows for sure what the final legislation and laws (if any) will include. Planning with flexibility may permit certain transactions to be unwound or come within the parameters of the ultimate legislation as enacted. In addition, if legislation is enacted into law, it may be very close to the end of the calendar year. Thus, there could be a very short window of opportunity for last minute planning if the effective date of any legislation is January 1, 2022.
Finally, with respect to the introduction of bills in Congress, proposed legislation is just the beginning of the legislative process. Given the overall process of enacting legislation, including committee hearings, votes in both the House and Senate, Conference committees, signature by the President, etc., it is fair to say that no one knows what final legislation will look like until it is passed.
Below are selected key provisions of the President’s American Families Plan and the House Ways and Means proposed legislation.
I hope this information is helpful. If you would like to discuss any of the items, please do not hesitate to call.
This article was prepared by Lincoln Financial Network. Lincoln Financial Network is the marketing name for the retail and financial planning affiliates of Lincoln Financial Group and includes Lincoln Financial Securities Corporation and Lincoln Financial Advisors Corp., broker-dealers, registered investment advisors and members of FINRA and SIPC. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Lincoln Financial Network and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
The citation for the American Families Plan is:
The citation for the House Ways and Means Committee proposal is: