Year-end 2020 represents a unique window to contemplate planning opportunities, as taxpayers face a dilemma: act now in 2020 to lock in potential tax savings or wait until 2021 to see whether President-elect Joe Biden’s tax proposals1 will gain traction in Congress. The risk is future tax reform could potentially be applied retroactively to January 1, which, while rare is not unprecedented.
The outlook for tax reform legislation in 2021 largely hinges on which party controls the Senate; Republicans currently hold a narrow edge (50-48), with the final two seats—both for Georgia—to be decided in special run-off elections2 on January 5, 2021. Should Republicans win at least one of those Senate seats, Republicans would retain control of the Senate, which would, in turn, greatly reduce the odds of significant near-term tax reform.
PLANNING CONSIDERATIONS TIED TO POTENTIAL TAX REFORM
Using the Lifetime Gift Tax Exemption
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, approximately doubled the estate exemption—from $5.49 million per person in 2017 to $11.18 million per person in 2018. The increased exemption amounts, under TCJA, are scheduled to run through 2025, after which the basic exclusion amount (BEA) is set to revert to the 2017 level of $5 million per person, plus inflation adjustments.
The lifetime gifting exemption currently stands at $11.58 million per person (with a top federal estate tax rate of 40 percent), though President-elect Joe Biden has proposed to “return the estate tax to 2009 levels” which would imply an exemption of $3.5 million per person (plus inflation adjustments), with a top federal estate tax rate of 45 percent.
Importantly, the Treasury Department and IRS issued final regulations in November 2019 clarifying that taxpayers taking advantage of the increased exemption amounts would not be subject to a clawback, should the exemption amount decrease from current levels.