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Smart Planning for an Uncertain Tax Landscape Thumbnail

Smart Planning for an Uncertain Tax Landscape

Key Takeaways

  • No one knows if and when tax rates will change under a new administration. Just prepare for change across the board.
  • For successful people, income, estate, and capital gain tax rates could be going up, although changes may not be immediate.
  • However, there may be good news for business owners, property owners in high-tax states, and for those who are charitably inclined.


It goes without saying that 2020 was a challenging year. For many, it was a devastating year as they lost a loved one, a job, a business, or substantial personal wealth. The fallout from the pandemic was felt far and wide.

I believe there is light at the end of the tunnel, but challenges will continue with a bumpy vaccine roll-out, ever-increasing COVID-19 death count, and an economy still trying to regain its footing as we recover from the highest jobless rate since the Great Depression.

At times like these, I like to reflect on our nation’s history. We have been through tough times before and we will face them again. But with each crisis, Americans always find a way to rally and become stronger and more successful in the process. As we usher in a new administration, I believe this pattern of hope and resilience will continue.

Tax Landscape

With Democrats now controlling the White House, Congress, and the Senate, many are wondering what tax policies will look like going forward. That question is difficult to answer, but I have listed some important considerations to help guide you in your planning: 

  1. Moderate changes at first. With a partisan Senate split 50/50, the Democrats only have a razor-thin majority because (Democratic) Vice President, Kamala Harris can be called in to cast a deciding vote. With no clear-cut majority, many experts believe that any tax policy changes will have to be moderate and centrist since the Democrats cannot afford to lose votes.
  2. No immediate impact. The Biden Administration will initially be preoccupied with slowing the spread of COVID-19, vaccinating the public, and restoring employment. Any tax changes will likely be delayed until late 2021, or more likely, 2022.
  3. Higher rates eventually. Assume tax rates will go up (not down) for most successful people in the future. There are proposals to increase ordinary income tax rates to pre-Trump administration levels, especially for those making over $400,000 a year. There is also a strong likelihood of a potential increase in the capital gains rate and a decrease in the federal estate tax exemption. Each of these proposals will impact affluent taxpayers.
  4. Do not jump to conclusions. There is tremendous speculation about higher tax rates, but no clear consensus. No one really knows what will happen on the tax policy front. I can only tell you that after 30 years as a CPA, final legislation rarely matches the initial proposals. Expect the unexpected.

Good News for Business Owners

Amid the holiday distractions, former President Trump signed the Consolidated Appropriations Act, 2021 (CAA) on December 27th, 2020. The CAA provides badly needed clarification about the Paycheck Protection Program (PPP) and allows loan recipients to apply for forgiveness of their loans AND to deduct from business income the expenses they paid using PPP funds. In effect, many small business owners will be receiving a fully forgiven (and non-taxable) loan from the government to help them get through these tough times.

Also, the new “Economic Aid to the Hard-Hit Small Businesses, Nonprofits, and Venues Act,” has made additional funding available for the second round of (PPP) loans. Businesses are generally eligible for the second PPP loan if they can show a 25% decline in revenue from any quarter in 2020 vs. a comparable quarter in 2019. Please contact your CPA and/or banker if you think you may be eligible for the second round of PPP loans.

Required Minimum Distributions (RMDs)

Your RMD is the minimum amount of money you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your IRA, SEP-IRA, SIMPLE IRA, or other retirement plans when you reach age 72 (70 ½ if you reached 70 ½ before January 1, 2020). Note: Roth IRAs do not require RMDs until after the death of the owner.

Due to the pandemic, RMDs from IRAs and retirement plans were waived in 2020 but will be reinstated in 2021. You do not have to do a makeup withdrawal for 2020, but you will need to resume taking distributions in 2021 and beyond. Also remember if you are 70 ½, the most tax-efficient way to make charitable contributions is from your IRA to a qualified charity.

We Continue to Monitor Tax Changes

No one knows what the tax future will bring, but we do expect successful individuals and their families to be paying more taxes (not less) under the new administration. We will continue to monitor potential tax changes closely and will assess any planning strategies that may need to be executed as we move forward. Please feel free to contact your Soundmark advisor with any questions and/or concerns.

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Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.

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