Potential tax rate increase in 2021

[Jim in PA]

Here is a scenario for discussion. Suppose that in the election, Joe Biden is elected and his coattails are long enough to give the Democrats control of the Senate. I think that most observers believe that the Democrats will keep control of the House, so under this scenario, they have control of both houses and the Presidency. Ok a last supposition, they then make good on the political promise to roll back the previous tax cuts.

My question is: when would that tax increase be likely to take effect? In 2021 or 2022? One of my current tax planning items is converting Traditional IRAs to Roth. I’ve been fairly aggressive in doing that, but have more to do. I’m doing my 2020 tax planning, but if this scenario we’re to unfold, I’d be looking to convert even more in late 2020 if we could have higher rates starting in 2021. Is that likely?

 

[Qs Laptop]

Here is a scenario for discussion. Suppose that in the election, Joe Biden is elected and his coattails are long enough to give the Democrats control of the Senate. I think that most observers believe that the Democrats will keep control of the House, so under this scenario, they have control of both houses and the Presidency. Ok a last supposition, they then make good on the political promise to roll back the previous tax cuts.

You mean like they did in 2009-2010? Remember, the Democrats had a majority in both legislatures and held the Presidency and the Bush tax cuts endured. Yes, there was the Great Recession, but Obama ran on repealing the tax cuts and he didn't.

Even when the Bush tax cuts were supposed to expire in 2010, Obama signed a two year extension through 2012 and then on New Year's Eve 2012 Congress passed another partial extension, which Obama signed.

My question is: when would that tax increase be likely to take effect? In 2021 or 2022? One of my current tax planning items is converting Traditional IRAs to Roth. I’ve been fairly aggressive in doing that, but have more to do. I’m doing my 2020 tax planning, but if this scenario we’re to unfold, I’d be looking to convert even more in late 2020 if we could have higher rates starting in 2021. Is that likely?

I would think if there was a repeal of the Trump tax cuts it would happen quickly and take effect on day one of the start of the next fiscal quarter. So, if Congress passes it in early 2021, maybe it takes effect on July 1, 2021. If Congress doesn't get it done right away, maybe it takes effect October 1, 2021, or possibly January 1, 2022. But with the economic slowdown caused by the coronavirus shutdowns I doubt there will be any tax increases.

 

[SecondCor521]

My question is: when would that tax increase be likely to take effect? In 2021 or 2022?

I would think 1/1/2022 at the earliest, but we each get to roll the dice and take our chances.

 

[MRG]

Well after porky visits.

 

[azxracer]

So who's taxes would go up? I've seen very little + impact to my personal income taxes with the 2017 TCaJA. So I'd assume corp taxes will be the target (if any). Likelihood of a corp tax increase? pretty slim, I'd expect as no politicians campaign on increasing taxes (irrespective of political advertising). And if corp taxes do increase would stocks go down? And would your IRA to Roth conversion be impacted? Lots to consider.

 

[Sunset]

My thought is regardless of who is controlling the house , senate, and WH, there will be no tax increase for 2 years.

Because, there will be record unemployment continuing, record bankruptcies ongoing, and generally the worst Recession since the Depression, as the $1200 stimulus check, and extra UI money won't last forever.

 

[Montecfo]

Hard to see how we increase taxes in a recession.

I also think they will not just roll back the tax cuts. Too much stuff people like.

Recall that corporate tax reform to make the US more competitive internationally was a key part. Rolling that back would damage financial assets and the economy, but it is more likely since corporations don't vote (well, except with their feet by moving jobs overseas and reincorporating. In tax havens).

 

[Aerides]

Well after porky visits.

He can stay on his farm if we keep political opinions and partisan stuff out of it. This is a question of mechanics, and does not require side-ism and bickering to be productive.

So, OP. Of course even if the election changes party control, you can make this decision in December. And even if the WH changes, the Senate and House are also in play. But for the purposes of your decision making let's assume it all ends up D/D/D:

The economy - as noted upthread there is a precedent for pausing the promised increase if the economy is still in recession/early-recovery. I'm assuming early-recovery would be the best case. So 2021 is likely off the table. If "they" did implement the law changes in 2021 I'd be skeptical that they'd go into effect without some warning - ie the start of the next quarter, but more likely year.

Then, 2022 becomes another election year. No one is going to want to increase taxes before the mid-terms.

And if/when they do, I see a potential for a piecemeal approach. Rolling back the corporate tax cuts and higher brackets - keeping the lower ones, something like that could be possible?

So put my $5 bet on 2023.

 

[COcheesehead]

I am not waiting for the other shoe(s) to drop. I have my commercial building up for sale and have a buyer. If cap gains don’t go up, I still have the cash in pocket. If they do go up, I’ll have dodged a bullet.

 

[USGrant1962]

...

The economy - as noted upthread there is a precedent for pausing the promised increase if the economy is still in recession/early-recovery. I'm assuming early-recovery would be the best case. So 2021 is likely off the table. If "they" did implement the law changes in 2021 I'd be skeptical that they'd go into effect without some warning - ie the start of the next quarter, but more likely year.

Then, 2022 becomes another election year. No one is going to want to increase taxes before the mid-terms.

...

Unfortunately, retroactive tax increases are a well established habit of tax-raising Congresses, no warning required. Here's just one of many articles on the subject:

https://www.heritage.org/taxes/report/retroactive-tax-increases-and-the-constitution

 

[pb4uski]

My guess would be 2021 if it does happen but in the whole scheme of things that is a minor issue. But it is what it is. The bigger question is whether favorable rates for qualified dividends and LTCG will endure as will stepped-up basis.

 

[Cobra9777]

Most of the benefit of the TCJA tax rate cuts went to corporations and thus indirectly to shareholders. The impact of rolling back the individual tax rate cuts is so small that no one would risk the political fallout, especially in a deep recession. They'd much more likely use their political capital to pass spending bills, like infrastructure, to help get people back to work.

One possible change would be to scale back the SALT cap which disproportionately impacted taxpayers in blue states. But I don't expect the rates themselves to go back up until they expire in 2025, which is not that far away. So I won't be changing my current Roth strategy, which is converting to the top of the 22% bracket.

 

[Happyras]

Unfortunately, retroactive tax increases are a well established habit of tax-raising Congresses, no warning required. Here's just one of many articles on the subject:

https://www.heritage.org/taxes/report/retroactive-tax-increases-and-the-constitution

So, on a similar trend, could one refile a prior year tax return? A very real example is the asset sale of our business. I chose to spread the capital gains over an installment sale. I still get screwed on the cap gains, but it is taxed at 20% with no NIIT as we were active in the business. We pay cap gains on the principle received each year, plus full tax on interest. One target I could see would be to increase the capital gains tax by dollar bracket (very few impacted, but significant for those that it does impact). Could one characterize the sale back to a one time gain in the year it occurred? Still 20% rate, one lump, but the installments would only be taxed on the interest received. If they can retro taxes, we should be able to retro filing in such a case where there is an accounting choice in treatment for the capital gains.

It would seem only fair as the whole treatment of the sale was spread against the tax law at that time, to complete the installments at the expiration of the tax act.

 

[FIREchief]

Here is a scenario for discussion. Suppose that in the election, Joe Biden is elected and his coattails are long enough to give the Democrats control of the Senate. I think that most observers believe that the Democrats will keep control of the House, so under this scenario, they have control of both houses and the Presidency. Ok a last supposition, they then make good on the political promise to roll back the previous tax cuts.

Great thread Jim. I didn't see this one and started another yesterday based on a similar scenario.

In late 2017, Washington enacted various changes to the tax laws effective for 2018. As I understand it, most of the provisions (notably, the reductions to individual income tax rates and the increase of the standard deduction) are due to sunset in 2025. I believe that this was driven by the use of reconciliation to pass the legislation. This allowed the changes to be passed by simple majority in the Senate, rather than requiring a Republican super majority (the Republicans held a majority in both houses at that time). Joe Biden recently claimed that he would immediately reverse much of the tax reductions if elected. Can he do this without the Democrats holding both houses of congress? I ask not as a political question, but because my current financial planning assumes the laws will not change until at least 2026. I'm asking only to better understand the laws. Granted, I'm hoping that the rates will stay low until at least the end of 2025. Thanks.

I believe that you are suggesting the same scenario. Fortunately, we'll know by Jan 1 2021 if the Democrats will be in this position. To your question, I'm really hoping that Jan 1 2022 would be the soonest that we would see any law changes take effect. One of my concerns is centered on the treatment of capital gains. I was tentatively planning for 2021 to be a big Roth conversion year, followed by several years of capping my taxable income at the top of the zero percent CG bracket so as to cash out some after-tax gains without paying any CG taxes. If they seem to be gunning for significant changes to CG treatment, I may need to rethink this. Granted, the zero percent CG bracket is advantageous only to those with modest incomes, however it likely really benefits folks with significant assets who are able to artificially cap their taxable incomes for a year or two.

 

[MichaelB]

Tax rates and alternative scenarios can be discussed without getting into election or partisan specifics. Let’s please make en effort to keep election politics out of the discussion.

 

[SecondCor521]

So, on a similar trend, could one refile a prior year tax return?

If the tax law is changed retroactively, I have seen cases where yes, taxpayers are entitled to refile a previous tax return in order to take whatever advantage of the retroactive tax change they wish. It happened this year with a few things; I can't remember the details because they didn't apply to my situation but I might be able to find them if anyone is really interested.

Usually one can only amend back three years or so, but I don't think the tax law has been changed that retroactively in a while, if ever. Of course, amending more than the previous year can also have cascading effects forward and so if one chose to amend, say, their 2018 return, they very well might have to amend their 2019 return as well. May be well worth the hassle depending on the amounts involved, of course.

I think any changes in the tax law will require an alignment of both houses of Congress and the Presidency. It also seems to me that even when there is such alignment and a motivation to do something, it takes several months to iron out a final text and get it through all the mechanics of passage. It certainly cannot be done on inauguration day or via executive action.

 

[Independent]

My thought is regardless of who is controlling the house , senate, and WH, there will be no tax increase for 2 years.

Because, there will be record unemployment continuing, record bankruptcies ongoing, and generally the worst Recession since the Depression, as the $1200 stimulus check, and extra UI money won't last forever.

+1

Remember, also, that most of the individual tax reductions in the TCJA expire in 2025. If Congress wants to raise taxes on individuals, it can simply do nothing.

 

[samm]

You mean like they did in 2009-2010? Remember, the Democrats had a majority in both legislatures and held the Presidency and the Bush tax cuts endured. Yes, there was the Great Recession, but Obama ran on repealing the tax cuts and he didn't.

Even when the Bush tax cuts were supposed to expire in 2010, Obama signed a two year extension through 2012 and then on New Year's Eve 2012 Congress passed another partial extension, which Obama signed.



I would think if there was a repeal of the Trump tax cuts it would happen quickly and take effect on day one of the start of the next fiscal quarter. So, if Congress passes it in early 2021, maybe it takes effect on July 1, 2021. If Congress doesn't get it done right away, maybe it takes effect October 1, 2021, or possibly January 1, 2022. But with the economic slowdown caused by the coronavirus shutdowns I doubt there will be any tax increases.

+1
Well said.
Tax increases would slow the economic recovery, give the Republicans an issue, and anger many people. As long as the Treasury can sell bonds to finance the deficit, I do not think there will be a big tax increase.

A bigger worry is if/when the national debt is fully monetized and there is hyperinflation.

 

[Al in Ohio]

Unfortunately, retroactive tax increases are a well established habit of tax-raising Congresses, no warning required. Here's just one of many articles on the subject:



https://www.heritage.org/taxes/report/retroactive-tax-increases-and-the-constitution

You would have to have a very high income for any rollback to affect you.

 

[G8tr]

+1
Well said.
Tax increases would slow the economic recovery, give the Republicans an issue, and anger many people. As long as the Treasury can sell bonds to finance the deficit, I do not think there will be a big tax increase.

A bigger worry is if/when the national debt is fully monetized and there is hyperinflation.

+1

When the bill comes due for deficit spending, I expect there will be implemention of a more European-style tax scheme, with a VAT and higher estate taxes.

 

[Montecfo]

Tax hike seems unlikely anytime soon. Congress will not want to do this with so many out of work.

You need a bigger economy right now to grow revenue.

 

[G8tr]

Tax hike seems unlikely anytime soon. Congress will not want to do this with so many out of work.

You need a bigger economy right now to grow revenue.

There is significant political pressure growing on the incoming administration to raise taxes (or close loopholes) that allow many large companies (like Amazon) to pay very little in net taxes. The problem with doing so is that those taxes will find their way into consumer prices or reduced hiring.

 

[Montecfo]

There is significant political pressure growing on the incoming administration to raise taxes (or close loopholes) that allow many large companies (like Amazon) to pay very little in net taxes. The problem with doing so is that those taxes will find their way into consumer prices or reduced hiring.

And ship jobs overseas. I doubt that will fly.

 

[USGrant1962]

There is significant political pressure growing on the incoming administration to raise taxes (or close loopholes) that allow many large companies (like Amazon) to pay very little in net taxes. The problem with doing so is that those taxes will find their way into consumer prices or reduced hiring.

Yup. I've said it before - corporations do not pay taxes. They collect them on behalf of the government. From customers, employees or owners (stockholders). There is no other source of money.

 

[pb4uski]

+1

When the bill comes due for deficit spending, I expect there will be implemention of a more European-style tax scheme, with a VAT and higher estate taxes.

Many people think this way and I certainly have in the past... thinking of government like a family or business that ultimately will have to pay its debts ($27.4T).

However, while I'm not yet convinced of it, there is a school of thought that realistically government never has to eventually pay off its debts as long as it has the ability to "print" money so the bill never really becomes due. The idea is unconventional but IMO has a certain amount of merit... but as I say, I'm not yet convinced.