United States: 2020 Year-End Tax Planning Guide

Important Tax Strategies for a Transitional and Untraditional Year-End

First and foremost, we hope that you, your family and all of your loved ones are remaining safe and healthy during this incredibly difficult year, which has been challenging on many different levels. While achieving tax savings is an important financial goal, 2020 has certainly emphasized how secondary or even tertiary of a concern this can be.

That being said, this past year has seen the passage of several significant tax laws – among them the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which we wrote about in this  Alert and the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which we wrote about in this  Alert). The SECURE Act changed many tax rules related to retirement contributions and distributions under an individual retirement account (IRA) or 401(k), while the CARES Act utilized numerous tax and other financial provisions to inject cash into a struggling economy to assist both businesses and individuals in response to COVID-19.

As we near the end of the year, there is still time to position yourself to take advantage of the opportunities presented by the new tax acts, including identification and execution, before year-end to reduce your 2020 tax liability. Our annual Tax Planning Guide is designed to highlight notable tax provisions and potential planning opportunities to consider for 2020 and, in some cases, 2021, both with tempered caution and balance this year.

With a tumultuous election (almost) behind us, we are gaining greater clarity on what tax measures may be implemented in 2021 and beyond. Based upon current projections by major news outlets while awaiting certified results, it is likely former Vice President Joe Biden will become the 46th president on January 20, 2021.

With his election, as with any new administration, there comes the eternal optimism of an incoming party being able to make broad, systematic changes to shape the government in their image. Of course, in order to make the most ambitious changes, a party would need to control the House, Senate and presidency, as the Democrats did when passing the Affordable Care Act in 2010, and as the Republicans did when passing the Tax Cuts and Jobs Act (TCJA) in 2017. As of this writing, media outlets are projecting that the House of Representatives will remain controlled by the Democrats for the 117th Congress starting in 2021, albeit with a smaller majority than they enjoyed in the 116th Congress. Regarding the Senate, currently most outlets are predicting that Republicans will control 50 seats, as compared to the Democrats' 48. The two remaining seats in the Senate will be decided in run-off elections to occur in Georgia on January 5, 2021.

In order for Democrats to win control of the Senate, they will need to win both of the available Georgia Senate seats, which then require Democrats to utilize Vice President-elect Kamala Harris as a tiebreaker. Even in such a scenario, for any legislation to pass by a simple majority, the Democrats would need to obtain support from their entire caucus in the Senate with no dissenters. Thus, we believe it highly unlikely that ambitious and robust or even controversial legislation will be enacted in the near term. Rather, the president and Senate will likely need to build bipartisan consensus in order to get any legislation passed, as it is likely Republicans will win at least one seat in Georgia, and therefore retain control of the Senate. With the houses of Congress split in terms of political control, legislation will need to include items attractive to members on both sides of the aisle, or at least appropriate concessions to the other side. We do believe that with the ever-increasing deficit, especially in light of the trillions of dollars being spent to deal with the COVID-19 pandemic, Congress will need to act and a tax increase may (perhaps will) be needed to a certain degree. At this moment, we envision incremental, rather than sweeping, tax changes as both a divided Congress or a razor-thin controlled Congress would leave the prospects for major tax legislation remote at best.

For example, Congress has not yet passed a fiscal year 2021 budget resolution. As a result, it is possible the new Congress could pass piecemeal tax changes under a fiscal year 2021 budget in January followed by another round of tax changes later in the year when a fiscal year 2022 budget is negotiated.

The ideological differences in the Senate suggest at least two years of gridlock. However, with President-elect Biden and Senate Majority Leader McConnell's experience negotiating with Democrats in the House, both sides are capable negotiators and likely to get some legislation through. However, the process will not be easy or swift and we forecast change will be incremental and slow. Should Democrats gain control of the Senate in the 2022 election, tax increases would likely be swift and substantial, but both scenarios remain uncertain at this time.

Furthermore and uncharacteristically, another opportunity for tax planning may exist. Typically, the longer it takes to pass tax legislation, the harder it will become for legislators to justify an effective date retroactive to January 1, 2021. While not unprecedented, retroactive tax rate increases are relatively rare. There have been six major rate increases since 1980 and only the 1993 increases in the corporate tax rate from 34 percent to 35 percent and individual rates from 31 percent to 39.6 percent were retroactive to January 1. The 1993 bill was passed in August and made retroactive to January 1, 1993. With a divided government, compounded by a pandemic, it may be difficult to match this timeline. Interestingly, it took all of 2017 to enact sweeping tax changes and President Trump and the Republicans made tax reform a top priority.

So, while tax increases are not typically effective prior to the date a bill is first introduced in Congress, if tax legislation does manage to get traction in 2021, another planning window to execute tax strategies from early January until a formal bill is introduced in the House Ways and Means Committee may exist.

As a result, we recommend the prudent approach of planning now, based on current law, and revising those plans as the need arises.

So, please check in with us and keep a watchful eye on our Alerts, which are published throughout the year and contain information on tax developments that are designed to keep you informed of significant changes in those environments.

In this 2020 Year-End Tax Planning Guide  prepared by the Tax Accounting Group (TAG) of Duane Morris, we walk you through the steps needed to assess your personal and business tax situation in light of the new laws and identify actions needed before year-end to reduce your 2020 tax liability.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.