The Georgia Senate Races and Personal Tax Planning
Good to Know-
Elections matter. They matter for a number of reasons, many of which are far more profound than financial effects and, as such, are out of any financial professional’s control. However, the financial advisor or financial planner may help prepare a client for potential tax changes in 2021. If, as a result of the Georgia Senate races, the same party controls the Senate in addition to controlling the Presidency and the House, potential tax changes are likely. The emphasis here is upon “potential.” Even if new legislation is passed and signed into law, the effective date may (or may not) provide a window of time for tax planning. We will begin with potential income tax changes. 1
Income Tax
Top Marginal Income Tax Rates
Current Status: The maximum marginal income tax rate is 37% and, for example, would apply to a single taxpayer with taxable income greater than $523,600 (2021, as indexed under current law).
- Potential 2021 Change: The top marginal rate could increase to 39.6% and would apply at lower taxable incomes. For example, a taxpayer filing as “single” would pay 39.6% on taxable income over $400,000.
- Result: This change would potentially affect taxpayers at relatively high taxable incomes no matter their filing status. As but one example, a single taxpayer with $600,000 of taxable income in 2021 would pay about $7,700 more in income tax.
Limits on Itemized Deductions
Current Status: There are no caps on itemized deductions other than the state/local tax deduction limit and the deductions subject to an adjusted gross income factor (i.e., charitable and medical deductions).
- Potential 2021 Change: Itemized deductions would be reduced or phased out completely at higher taxable incomes.
- Result: A “stealth” tax increase of up to 39.6% on high income taxpayers with significant itemized deductions under current law.
Increased Tax Credits
- A First-Time Homebuyer’s Credit of up to $15,000 may be reinstated.
- The Child Tax Credit could increase by 50% or more.
- The Child and Dependent Care Credit could as much as triple.
- The Earned Income Tax Credit for childless workers over age 65 may become available.
Capital Gains Tax
Current Status: Property owned by a decedent at death generally gets a step-up in income tax basis (exceptions apply), thereby reducing or eliminating capital gains tax at an heir’s subsequent sale of the property. The maximum capital gain tax rate is 20%, no matter how high the taxpayer’s income.
- Potential 2021 Changes:
- The step-up in income tax basis for inherited property could be eliminated.
- Taxpayers with incomes above $1,000,000 may no longer be eligible for capital gain tax rates; capital gains would be taxed at ordinary income tax rates.
- Result: Taxes on capital gains of high-income taxpayers and heirs could rise by 100% or more.
Gift, Estate, and Generation-Skipping Transfer Taxes
Current Status:
- The maximum transfer tax rate on taxable transfers is 40%.
- Taxable gifts and transfers at death are excluded from gift and/or estate taxes up to $11,700,000 (2021, as indexed under current law).
- Generation-skipping taxable gifts and transfers at death (e.g., transfers to grandchildren) are exempt from the Generation-Skipping Transfer Tax up to $11,700,000 (2021, as indexed under current law).
- Potential 2021 Changes:
- A 5% increase in the maximum transfer tax rates to 45%.
- A reduction in the exclusion and exemption amounts from $11,700,000 to $3,500,000.
- Result:
- A client making cumulative taxable transfers of $11,700,000 could see his or her Gift/Estate and/or Generation-Skipping Transfer tax go from $0 to $3,690,000.
- Advance planning may be required to minimize Gift, Estate, and Generation-Skipping Transfer Taxes.
- The number of clients subject to these transfer taxes could increase by 400%.
Social Security Tax
Current Status: Social Security taxes of 12.4% (6.2% withheld from employee plus 6.2% matched by employer) are currently paid on earned income up to the Social Security Taxable Wage Base (SSTWB) of $142,800 (2021, as indexed under current law).
- Potential 2021 Change: New Social Security tax of 12.4% (6.2% withheld from employee plus 6.2% matched by employer) would be paid on employee’s earned income above $400,000.
- Result: An increased tax cost of 6.2% for high-income clients.
Takeaways
Seldom have the tax stakes been higher or more uncertain than now. To paraphrase Hamlet, “To modify my tax plan or not to modify my tax plan, that is the question.” Your client should confer with a competent, experienced tax professional to answer that question.
Disclaimer
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide legal, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog. Furthermore, this information is not intended to promote or support any political party, candidate or platform.
1Watson,G., et al. (2020, October 22). Details and Analysis of President-Elect Joe Biden’s Tax Plan. Tax Foundation. Retrieved from https://taxfoundation.org/joe-biden-tax-plan-2020/#Key
