- Democrats now have a slim majority in the Senate, following victories in two runoff races in Georgia, according to NBC News projections. This means President-elect Joe Biden's tax plan could be a step closer to unfolding.
- Biden’s plan includes raising taxes on households with more than $400,000 in income and increasing corporate taxes.
- Nevertheless, passing a comprehensive tax overhaul could still be a complicated affair. Work with your tax pro before making any moves.
Democrats will now have a narrow lead in the Senate, which may give President-elect Joe Biden's tax plan a better chance at passing.
Georgia hosted two hotly contested Senate runoff races on Tuesday.
Democrat Rev. Raphael Warnock won the race against incumbent Republican Sen. Kelly Loeffler, according to NBC News projections and Democrat Jon Ossoff has also won his contest against Republican David Perdue, NBC News projects.
Two wins in Georgia give Democrats a 50-50 split for control over the Senate, with Vice President-elect Kamala Harris as the tiebreaker.
This also means that Biden's plan – a proposal that calls for higher taxes on households with more than $400,000 in income – could be a step closer to fruition.
Don't overhaul your own plans just yet, though.
"2020 has taught us that the danger of predicting is high, so we always try to plan and not predict," said Pam Lucina, chief fiduciary officer and head of the trust and advisory practice at Northern Trust Wealth Management.
"The mantra is what we've always said, 'Don't make changes based on political predictions,'" she said. "Your long-term goals are to always be a guide."
Reviewing key proposal elements
Here's a recap of the some of the major elements Biden pitched during his campaign.
Increasing the top individual income tax rate to 39.6%: The Tax Cuts and Jobs Act set a top marginal individual income tax rate of 37%.
Extending the 12.4% portion of the Social Security tax to earnings over $400,000. Under current law, wages up to $137,700 are subject to this tax.
Raising the capital gains rate to 39.6% for taxpayers with more than $1 million in income. Right now, wealthy investors are subject to a top rate of 20% on long-term capital gains.
Eliminating the step-up in basis. Today, heirs receive assets valued as of the date of death, which means they can sell these investments with little to no tax. Biden's proposal would tax unrealized capital gains.
Lowering the amount wealthy families can transfer free of the estate and gift tax. The Tax Cuts and Jobs Act allows individuals to transfer up to $11.7 million without facing the gift or estate tax. Biden's proposal calls for lowering this limit to $3.5 million per individual in bequeaths and $1 million in gifts.
Raising corporate tax rates. The corporate tax rate is currently 21%, but Biden's proposal calls for increasing it to 28%.
At this point, tax professionals are grappling with queries from their clients.
"How likely are these things to happen? How soon might they happen? How high will taxes go?" asked John Gimigliano, principal-in-charge, federal tax legislative and regulatory services at KPMG.
Greenlighting a tax overhaul still unlikely
An even split in the Senate gives Biden's proposals more of a chance, but it doesn't guarantee the initiatives will move forward.
"This isn't 2017 – this is different," said Tony Nitti, CPA and partner in RubinBrown's Tax Services Group, recalling how Republicans had control of the Senate that year and were able to push forward the Tax Cuts and Jobs Act.
"There's a 50-50 tie at best, and every Democratic Senator has veto power over the bill," he said, noting moderate Democrats like Sen. Joe Manchin, D-W.Va., might be less likely to go along with a tax increase in a pandemic.
"Couple that with a thinner majority in the House and set it against the backdrop of the global pandemic, and it's really hard to envision a scenario where sweeping changes get done in that environment," said Nitti.
Lawmakers may also prioritize additional Covid-relief measures before they begin to tackle sweeping changes to the tax code.
"We're focusing on a very serious pandemic right now," said Lucina of Northern Trust. "All of the facts that are there don't point toward aggressive changes."
Indeed, Biden has said that he'd push for another round of stimulus payments in the next aid bill.
Coordinate with your tax professional
Tax professionals are telling their clients to sit tight for now. "We might not see those tax increases come up until later in the year or maybe next year," said Gimigliano of KPMG.
Instead, investors should coordinate with their tax professionals and model out how their finances might change should the Biden tax proposals proceed.
"The modeling out is very important because it helps you prioritize the most important items," said Gimigliano. "You don't want to engage in drastic measures if you don't think these things are imminent."
It also doesn't hurt to revisit your plans and ensure they still reflect your long-term wishes.
"Do a gut check," said Lucina of Northern Trust. "Do you have good tax diversification in your portfolio that allows you to be flexible no matter what happens?"