On Monday December 14th, 2020 the electors for each state met to confirm President-Elect Biden’s election as the 46th President of the United States. What does that mean for you and your taxes? Well, that all depends on the Georgia senate runoff election in January.
How does a Tax bill become law?
First, any new tax legislation begins in the House of Representative Ways and Means Committee. Once the new “bill” makes its out of the Ways and Means Committee it is put to a vote of the entire House. Once the bill has passed in the House the Senate Finance Committee, the Ways and Means Senatorial counterpart, begins to hold hearings and discussions on the bill and the proposed new legislation in it. Finally, once the Senate Finance Committee makes any changes or amendments to the bill it goes to a vote on the Senate floor. Rarely, does a bill make it through both chambers of Congress with unanimity on the proposed changes. However, once consensus is achieved, the bill lands on the President’s desk for signature and execution into law.
How can Congress change the Trump Administration’s Tax Cuts and Jobs Act (TCJA)?
In 2017, the Trump Administration passed the TCJA, the largest tax reform in over three decades. Among some of the changes that the TCJA brought were the lowering of the individual rates for the seven-bracket structure, increases in the standard deduction for single filers, lowered the corporate tax rate to 21%, eliminated the corporate alternative minimum tax, and doubled the estate tax exemption from $5.6 million to $11.2 million. President-Elect Biden has called for a change to it and for greater tax reform. However, whether that reform will materialize through Congress is still unknown. For Congress to repeal the late Trump Administration tax reform actions it took it would need to use the Congressional Review Act (CRA), but to do this Congress would require consent of both chambers. This is exactly why the Georgia runoff election will be crucial for the future of a Biden Administration tax reform plan. If the Republicans win the Georgia runoff election, they will secure their majority of the Senate and retain the ability to halt any use of the CRA to overturn Trump Administration tax reform actions. However, should the Democrats win the runoff, both parties will have an equal 50 vote split. Effectively this would make the Democratic party the majority as Vice-President-Elect Kamala Harris would cast the tiebreaking vote and allow for such a reform to make it out of Congress and onto President-Elect Biden’s desk.
What changes will the new Biden Administration bring?
The Biden Administration has a new tax reform plan that it wishes to get through Congress. Among some of the changes that they wish to make are: increasing the corporate tax rate from 21% to 28%, create a minimum tax on corporations with book profits of $100 million or higher (effectively reintroducing a corporate alternative minimum tax), doubles the tax rate for Global Intangible Low Tax income (GILTI) from 10.5% to 21%, expand the New Market Tax Credit, provide tax credits for small businesses that adopt workplace retirement savings plans, and expands on renewable-energy related tax credits. Whether a new tax reform bill makes it through Congress or not, a Biden Administration will still have some power to alter or make interpretive changes to the current tax law through the Department of the Treasury. We may still see some of those proposed changes come through executive action rather than through a divided Congress.
Due to the uncertainty of what will come out of the Georgia Runoff election and its impact on the future changes to tax legislation real estate investors in Miami and in Florida should consider preparing for such a change. This can be done in various ways; deferring losses/deductible expenses until higher rates are implemented, accelerating income/gain while rates are still low, establishing an estate plan before the estate tax threshold drops, and actively looking at ways to best prepare for the possible changes to the TCJA under the new Biden Administration.