2021 year-end tax letter
As we write this year’s tax letter, we are reminded of our 2017 edition. While it is said history does not repeat itself, sometimes its events are awfully similar. In the fall of 2017, it was unclear whether the Tax Cuts and Jobs Act (TCJA) would be enacted. Provisions were being debated and there was no clear path to passage. The same can be said of 2021: The $3.5 trillion “human” infrastructure reconciliation package remains mired in debate between moderate and progressives within the Democratic Party. The bipartisan infrastructure bill is also ensnared in the same conflict, with the legislation’s future likely tied to the outcome of a successful budget reconciliation package negotiation. With little likelihood of Republican support, all but three Democratic votes will be needed in the House and all 50 Democratic senators will be needed for passage using the reconciliation process.
What does this mean for you?
At this time, it is difficult to say as the contents of the reconciliation bill are currently being fiercely debated. Whether the package’s top line is $1.5 trillion, $3.5 trillion or some amount in between, if Democrats are able to compromise and successfully pass a bill, it’s certain to include major tax changes. These changes could come in the form of a capital gains rate increase, corporate and individual rate increases, and modifications to the estate and gift tax. Based on the initial House Ways and Means Committee bill (see our previous tax alert), most of the provisions would not become effective until 2022, with the notable exception of capital gains (currently proposed for an effective date of Sept. 13, 2021). Consequently, we strongly recommend you monitor the progress of the ongoing negotiations carefully. Accelerating income into 2021 and deferring significant expenses until 2022 where practical may be the best planning strategy depending upon your tax bracket. With respect to capital gains, if a September effective date remains, the planning door may have closed; however, it is possible there will be a change in effective dates as negotiations progress, possibly to the date of enactment or even Jan. 1, 2022.
Our focus in this year’s letter is on the tax code modifications being considered, critical issues in healthcare and employee benefits, state and local tax trends as well as important reminders of expiring taxpayer-friendly provisions enacted via previous COVID-19 stimulus legislation.
Tax planning should be addressed throughout the year and be an integral part of financial planning. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues impact your tax position.