With a new administration comes the possibility of new tax laws. The basic proposals under Biden’s tax plans that were laid out during the campaign trail only impact taxpayers if their income is greater than $400,000 in a tax year. If that applies, then any realized capital gains and qualified dividends which are included in that income will be taxed at the taxpayer’s ordinary tax rate.
Passing such a change to capital gains rates is most likely to occur when Congress can turn its attention away from the COVID-19 crises. It seems unlikely they will pass any tax reform issues in 2021. Currently, in order to pass a bill in the Senate, 60 Senators are needed to override a legislative filibuster. There have been talks of ending the legislative filibuster but enough Democrats have said they do not support such an idea, this route does not seem practical.
There is a budgetary trick where a bill does not need to go through the legislative filibuster called budget reconciliation. Congress can only use the budget reconciliation trick to pass legislation with a simple majority once a fiscal year. Congress has currently voted and is in the process of using it to pass the $1.9 trillion COVID relief package sometime between late February and early March. The next time reconciliation could be used again is when the federal government’s next fiscal year starts.
It is unlikely there would be enough bipartisan support to increase capital gains through the normal legislative process, at this point.
Next fiscal year, it is possible we could see a tax bill passed through the reconciliation process. In 2017, this process was used to pass the Tax Cuts and Jobs Act. Based on the precedent set with that bill and how it needed to function through reconciliation, it is unlikely we’d see retroactive changes to the tax law, but most, if not all changes would be done prospectively. That would mean the earliest we would see any changes to the capital gains rates would be in 2022.
Finally, while no one knows the Biden administration’s priorities for sure, there are a lot of indications out there that they will try to use budget reconciliation process in the next fiscal year to address climate change. An increase in capital gains could be used there to offset some of the bill’s costs, but we would most likely not see comprehensive tax change similar to the Tax Cuts and Jobs Act.
After that change to use reconciliation, the ability to use it again during the Biden administration would hinge on the 2022 election cycle and if there is unilateral control of the White House, Senate and House of Representatives.
With these possible changes in mind, it’s a good time to work with your YHB Advisor to consider what these possible impacts will have and the possibilities of deferring or accelerating capital gains.
Meet the Experts
Nick’s expertise includes helping high wealth individual and large business entities with complex tax compliance, along with specializing in international, non-for-profit tax issues, and tax ethics issues. He has authored publications for the AICPA and co-authored a textbook, Tax Preparer Penalties and Circular 230 Enforcement, published by Thomas Reuters.
Alex is a Principal on our tax team working with clients around the DC and Northern Virginia area. He specializes in complex tax planning and compliance for individuals, estate, trusts, private foundations, and privately-held companies.
Alex has also obtained the Personal Financial Specialist (PFS) certification from the AICPA in September 2017.