Episode 048: Tax Forecast [Predictions for Tax Changes in 2021]

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Six months from now, what will your business’s tax position be? (Talk about a literal million-dollar question!)

President Biden has proposed new federal tax plans affecting both businesses and individuals. And while the specifics remain up in the air, the time to start preparing your business to adapt is now.

In this episode of The Wrap, Lisa Billings, CPA, and William Dow, CPA, join our hosts to discuss the possibilities of future tax changes under the Biden Administration and what implications they could have for businesses.

After listening to this episode, you’ll be able to:

  • Understand where the American Families Plan stands in the legislative life cycle
  • Differentiate the Made in America Tax Plan from the American Families Plan
  • Grasp what economic impact these plans may have and how it may influence decisions made by business owners and leaders
  • Know what provisions have been proposed as part of these plans
  • Understand what impact the federal tax plans may have on state taxes
  • Consider how your business can start anticipating future tax changes now

This episode reflects our views at the time it was recorded. Information within should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.

Commentators: (00:00:00) Hey, I’m Paul Perry and I’m Kim Hart sock, and your listening to the Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends. You need it so you can listen, learn, and then get on with your day. Now, let’s get down to business.

Kim Hartsock: (00:00:17) Hey, Paul.

Paul Perry: (00:00:23) Hey, Kim, how are you today? Wonderful.

Kim Hartsock: (00:00:26) Excited to be back for another episode of The Wrap?

Paul Perry: (00:00:30) Absolutely. It’s going to be a really good conversation on potential tax laws. What are we talking about?

Kim Hartsock: (00:00:35) Yeah, there’s been a lot of headlines in the news around this proposed American Families Plan. So with us today, we have two of our best tax experts at Warren Averitt and two of our members in our tax group, Lisa Billings and William Dow.  William and Lisa, welcome back to The Wrap.

Lisa Billings: (00:00:54) Hey, glad to be here today. Thank you.

William Dow: (00:00:56) I’m happy to be here. Thanks for having me.

Kim Hartsock: (00:00:58) So, Lisa, can you just help us out get started? You know, we’ve been hearing about this American Families plan. What is it?

Lisa Billings: (00:01:05) What it is right now is a proposal. And so what has happened is President Biden has put this proposal together of ways to help support families and provide extra incentives for lower income and middle income families, give them some rebates and some different tax law changes.
But the other side of that is also, there’s going to be some tax increases on the wealthy. Whenever you get into the meat of this plan. And so, so right now it’s just really in very early form, it has not turned is not gone to Congress yet, but it is out there and something that people are starting to look at.

William Dow: (00:01:45) Yeah. It’s interesting to note that there’re two different bills out there. They’re really, probably more than that, but there’s the American Families plan, which deals with individuals and the benefits, benefits to individuals. And then there’s what’s known as the “Made in America” tax plan, which has more of the business and corporate provisions. And I really think they split the two so that they, they could have more luck at passing them than having, you know, if it’s in one big bill, there’s going to be so much give and take. And it’s harder like in the American Family Planning, but how do you argue with that? Just based on the title of it, that’s what’s gonna be difficult.

Paul Perry: (00:02:21) So, uhm, I’m sure that there’s going to be some sort of economic impact of these changes. And like you said, Lisa, it’s still very much in the proposal stage. So I imagine there’s a lot of things that could be higher. There’s a lot of things that could be lower. We just don’t know yet.. So as they go forth and they make changes, can you kind of talk about what the potential economic impacts are, uh, related to these two plans?

Lisa Billings: (00:02:48) Absolutely. Paul, I mean, it’s really, one of the big things is we don’t know where it’s going to land, but it’s a pretty sure bet that taxes are going to go up and that is going to be a driver on businesses. Business owners are going to start making decisions, assuming that they are going to be paying more in taxes in the future.

William Dow: (00:03:08) Yeah and it’s interesting to note that a lot of this came about because we had COVID last year and a lot of the COVID relief provisions were, you know, trillions of dollars were going out to help individuals and businesses. Now, President Biden has his infrastructure plan that he wants to spend close to $2 trillion. He wants to spend updating the infrastructure. And so these proposals are ways they’re looking at to help pay for that. Now what’s interesting is in the America Family Plan, it’s proposed as $700 billion dollars based on tax increases. But what people don’t know is that it has a cost that’s greater than that. About 800 or 900 billion on tax credits is given to lower income. So there’s really already a net fiscal cost to that bill that’s there. So I think that’s going to get a lot of attention on Capitol Hill.

Kim Hartsock: (00:04:06) We just talked about it, right? Nothing has been sent to Congress. There is no piece of legislation yet, but what is being proposed? Can you talk a little bit about what is being proposed and to individuals what’s being proposed to corporations? How does this impact a state? So let’s just talk about what we know right now.

William Dow: (00:04:26) Okay. Uh, for instance, for corporations, there’s currently a21% tax rate. It’s one of the lowest rates we’ve ever had. President Biden’s proposal to raise that to 28%. So, um, you know, you you’ll think it’s only, you know, it sounds like seven percentage points, but it’s a pretty high increase in just the percentage increase in the tax rate.
And when you take that and combine it with the state tax rate, the state local income tax rate that gives the United States one of the highest overall tax rates of any developed country in the world. So President Biden is already making some noise about maybe dropping it down to 25% as opposed to the 28%.
So, um, that’ll be interesting to see, they’re also proposing a tax on just on book profits for companies that have the numbers floating around. It could be, you know, $2 billion in sales or profits it’s unknown, but they’re wanting to propose some type of minimum tax on large corporations to make sure that they’re paying some form of tax.
And when we get to the individuals, they want to raise the rates from 37% to 39.6, not a big increase. It’s kind of taking us back to where we were several years ago, but the big change there is, they want to tax long-term capital gains. They’re currently taxed at 20%.
They want to tax that at this new rate of 39.6% for, um, individuals that have several $400,000 of income. And then in some cases, a million dollars of gain, there’s already some jockeying going on there, but they really want to tax these long-term capital gains that they think that investors are getting too much of an advantage from this lower rate.
So if you go to 39.6, you add the best income tax, state, and local taxes. You know, you can, you’re getting close to 50% tax rate on some of this long-term gain. And then the states and trusts, they’re wanting to lower the exemption. That’s a little over 11 and a half million now to about three and a half million per person, but they’re wanting to get rid of the step up that you get at death and basically say that when someone passes away, any appreciating their assets is tax so automatic. If you have an income tax, then you have an estate tax on top of it. So, um, very honorous taxes that they want to do. And they’ve gone after state and wealthy individual for as long as I have practiced.
And what’s interesting is what I’ve always seen with him. They go after them. The rates have tended to go down. The exemptions tended to go up. So advancing, see if this pendulum finally swings back around, but we’re seeing significant estate planning going on right now to try and take advantage of this.
As I know, Lisa has seen a lot of planning going on already with businesses, and this is primarily like real estate. Okay.

Lisa Billings: (00:07:19) That’s right. I mean, we’ve, we’re seeing a lot of real estate people really look at what makes the most sense long-term or do I want to be holding long-term and if I have something that I want to sell, is this now the time where we know what the capital gains rate rates are?
Another thing that they have in this proposal, that real estate investors are looking at is they’ve mentioned potentially. Removing the 10 31 exchange, you know, the ability to tax-free exchange prop real estate for real estate. So that is something else that’s there or there they’ve proposed eliminating it for any gain over 500,000.
So, you know, that is something that. Has people really looking at long-term? You know, if there’s something that I want to sell, do I want to go ahead and sell it now?

Commentators: (00:08:08) To receive a monthly newsletter with Wrap topics, then head on over to warrenaverett.com/thewrap and subscribe to our email list to have it delivered right to your inbox.

Kim Hartsock: (00:08:18) Now back to the show. I think we’ve all gotten used to the fact that when a president comes into office, they have grand plans and big ideas and generally when it works through, the house works through the Senate. They don’t always get what they asked for. Right? So again, this is proposed and there’s probably going to be a lot of conversation and a lot of deal-making.
And I imagine when the House and Senate goes back to their local jurisdictions, they’re probably going to be hearing from a lot of businesses and hearing what we are hearing, which is how much of an impact this could have. So do you expect that this will be somehow negotiated and, and, and come down?
I mean, William, you mentioned that you’re already hearing the proposed 28 now as being considered going down to 25. So any, any thoughts on that?

William Dow: (00:09:16) Yeah, I think you’re going to see a lot of co-creation. This is basically, this has come out as his wish list of what he wants to happen.
So in history, you know, a child sends Santa his list of what he wants. You know, he’s not going to get everything, you know, I think that President Biden was expecting to get a lot of what he’s asking for. We also have a situation where one party controls the White House, the House and the Senate.
That’s going to make it for the Democrats to pass legislation that they want. What’s been happening though, is we’re starting to see some infighting already. Let’s say that negotiations have already taken place in the democratic party because representatives and senators from different states want different things and there’s already some arguing going on between them. So they’re going to have to come together on what they want. Before they can be successful in really passing anything. So there will be a lot of negotiations and give and take going on right now. Our concern though, is, you know, we’re definitely gonna be looking at probably increased tax rates.
There’s concern that if can we increase interest rates. So, you know, that could have very serious impact of the economy. And like Lisa said, especially like in the real estate industry, a lot of businesses do a lot of investors looking at getting out of what some of the assets they’re holding.
Before the rates go up and potentially, you know, interest rates going up causes real estate values to go down.

Paul Perry: (00:10:44) William, you mentioned earlier, you know, a little bit about the state side, but kind of what are the states doing? And in your, um, experience with these types of changes that are happening at the federal level, what is it you usually see come out from the state side?
Uh, is it usually complimentary? Is it opposite? Does it take a while for that to flush through the states. Just kind of, what are your thoughts?

William Dow: (00:11:10) The states fall into a couple of categories. They either, um, automatically follow the the U.S. internal revenue code. So we need change to take place there, they follow that. Uh, then you can have where, where it’s it’s, you know, we follow the law as of a certain date and have to adopt these. And there’s some that are just like, you know, we just have our own set of rules that we follow.
However, the law changes, Alabama follows it. So whatever provisions were to come out, Alabama would follow them and must specifically have legislation to get out of it. One thing to note is Alabama is one of the few states that allow the deduction for federal income taxes.
Federal rates dropped last couple of years, that’s been a huge fiscal pickup for the state of Alabama because taxpayers have had a smaller federal tax deduct. Therefore, they’ve paid more in Alabama income taxes. So Alabama had to do nothing and they really picked up a lot of revenue. So now, if they’re looking at raising federal rates, that’s going to be a a fiscal cost to the state. The state’s gonna have to find ways to make up that lost revenue.

Lisa Billings: (00:12:20) And one thing else that we’re seeing right now is that it does take the states a little while to get caught up and to address some issues that may happen. For instance, back in 2017, we had the tax cuts and jobs act, which eliminated the deduction for individuals for state taxes paid are capped at $10,000 per person.
So a lot of individuals who own flow-through entities or passer entities that were paying larger tax bills in the state are no longer getting that deduction on their federal return. And one other thing that we are starting to see, we have in Alabama and Georgia just passed their bill, allowing for this is for these pass through entities to be taxed at an entity level in the state, which really gives the owners a work around for this lack of deductibility of the state taxes on a federal return.
So that is something else that is out there that is starting to float around that, that the states are starting to adopt.

Kim Hartsock: (00:13:23) Very interesting perspectives on that. And I think that’s something that gets kind of lost is there’s also state implications to this. Right. So, all right… we’ve just heard all of this as a proposed wishlist of extreme, significant impacts for me as a business owner if I’m listening. There’s a lot of uncertainty around this. So what do I do? What do I do right now, knowing this has been proposed? I’m hearing that it could be effective January 1st. How do I plan when I don’t really know what I’m planning for?

Lisa Billings: (00:13:59) I think the key is really to just talk to your advisors and figure out what your long-term goals are, and really get a game plan in place. And you may not want to do anything. But I think it’s important to really think through how these proposed changes would affect you. And if that, if you do want to make any kind of changes.

William Dow: (00:14:20) Yeah. That’s a great point, Lisa. And it goes back to the old you never want the tax tail to wag the dog. So you never want to make a business economic decision based strictly on the taxes. It’s a factor that you look at.
A very simplistic example is if you own some stock that has regard up in value and you’re thinking. I don’t see how this can get any higher. This is such a high value. It would make sense to sell it. At the lower capital gain rates, no one. They may go up next year. So, you know, cause you’re gambling by waiting.
So there again, you know, if you think of selling something, then it makes sense to do it. So that’d be the case you I’m in a business. And, um, what Lisa, I, and other are seeing is there’s just a lot of cash out there. Chasing opportunities. They’re chasing businesses. They’re checking real estate and other investments.
It’s causing prices to go up to really a unheard of levels before. So it’s really puts a lot of business owners in a great position if they’re looking at selling because, you know, I think prices are high right now. Um, another aspect of the individuals that, that hadn’t come out of a lot of attention is they’re looking at doing away with the cap on FICA taxes.
In other words, that’s the payroll tax that you paid that starts at about a hundred and $130,000. They want to get rid of that if you make over $400,000. So you could see your tax rates going from 37 to 39.6% plus almost 12% of yourself and additional FICA tax added on top of that.
So you can see a significant increase. And that’s one, we get concerned will be bypassed because people don’t think of that as an income tax. It’s more preparer will tax the average earner is not going to be at that level.

Kim Hartsock: (00:16:05) So another point that I think is getting a lot of headlines right now is that it’s been announced from the administration, that there will be a significant amount of money invested into the IRS. And the idea there is that without raising tax rates, we could be collecting more income tax by doing more audits.

Is there any truth behind that? Is that something that there will, that you think will come to fruition? Where does that stand again?

William Dow: (00:16:34) That’s a great point. And that’s one, one area that they have been really talking about in Washington, trying to get some traction behind it. Um, and they’re looking at really adding additional funding to the IRS to add examinations for high net worth high-income individuals and go after them. So, which we’ll see if this passes, is you’ll see, a large increase in IRS agents, uh, going after individuals. Um, we’re already seen a little bit in that arena when it goes on the presumption that these, these hat earners are doing something wrong.
And I think the numbers that the IRS and treasury about health that have out there for. Revenue they’re losing weight. I think they’re overstate because, you know, yeah. She wanted to tax planning. You want to do what’s appropriate, but we have no plans to do anything that they shouldn’t do. And so if they get out to it, their relation to anything they find.
And so I think that it’s a little bit of a pipe dream to think that they’re gonna raise all this revenue. I think you’re going to say it’s going to a lot of trouble. It’s going to calls for taxpayers and practitioners and responding to a lot of these IRS notices.

Paul Perry: (00:17:39) Excellent points. So here on The Wrap, we’d like to wrap it up in 60 seconds or less. What’s the one thing you want the business leaders to think about or to know, as they walk away from this conversation.

William Dow: (00:17:52) I think that they need to think about that. There’s definitely going to be some type of tax rate increases. Hence, they need to be planning for that. Uh, you know, as it impacts their business, uh, it will impact their financial statements.
Um, so they might look at, you know, covenants they have with banks on loans to make sure that these increased tax rates won’t do anything that’ll cause any issues with those existing covenants.

Lisa Billings: (00:18:14) I think the biggest thing is start talking to your advisors now. Start talking about what your game plan will be if you even need to have a game plan, but at least have the conversation and not just wait to see what happens.

Kim Hartsock: (00:18:29) I have a feeling that we will be having a follow-up to this conversation. And, uh, so Lisa and William, are you gonna make yourself available whenever we do have some actual legislation to discuss?

William Dow: (00:18:41) Yes, definitely. One thing for sure is there will be some tax legislation and it will be probably somewhat different than what we’re talking about today.

Lisa Billings: (00:18:48) Absolutely. I completely agree.

Paul Perry: (00:18:50) Well, thank you all very much for being with us. Always enjoy the conversation and thanks for what you brought to the listener,

William Dow: (00:18:56) All right. Thank you.

Lisa Billings: (00:18:57) Thank you.

Commentators: (00:18:59) And that’s a Wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to the podcast series, or make a suggestion of other topics you want to hear, visit us at warrenaverett.com/thewrap.

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