The year 2021 is on track to be a roller coaster for tax and accounting professionals. With tax hikes rushing full speed ahead and more twists and turns likely hiding just around the corner, is it still possible for your clients to pay less in taxes?
The answer may surprise you. Even with the steepest increases in taxes in the last 30 years on the horizon, tax planners can buckle up their clients and get them ready to come out ahead. Let’s look at the projected changes and then discuss how to best prepare your clients.
As a tax planner, you’ll first need to consider all of the policies that are fueling this special tax season, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, COVID Relief and Omnibus Agreement, American Rescue Plan (ARP), American Jobs Plan (AJP) and the American Families Plan (AFP).
Then it’s time to brace yourself for the possibility of retroactive legislation. Though this hasn’t occurred often in recent years, seasoned tax professionals may remember burning the midnight oil when the Omnibus Budget Reconciliation Act of 1993 was signed into law in August but was enacted retroactive to January.
Know Your Numbers: Proposed Tax Hikes
While this year’s changes aren’t yet set in stone, your clients are likely chomping at the bit wondering what’s coming next. You can provide them with the proposed numbers to steel their nerves before the ride.
Here’s a comparison of the current law to the increases proposed during President Biden’s campaign: corporate tax rate (current: 21% | proposed: 28%), capital gains top rate (current: 20% | proposed: 39.6%), top individual income tax rate (current: 37% | proposed: 39.6%), FICA tax (current: 6.2% stops at $137,700 | proposed: 6.2% continues over $400,000), top effective rate on pass through income (current: 29.6% | proposed: 39.6%).
Highlights of the American Rescue Plan
Your clients may also have heard about the ARP and are asking you if they qualify for relief, and you’ll need to be equipped with the highlights so you can strategize where applicable. The ARP includes small business tax credits, among them state small business credit incentives, Families First Coronavirus Response Act (FFCRA), Sick/Family Leave Credits, and Employee Retention Credits (ERC).
The ARP features individual tax credits, too, such as the suspension of tax on a portion of unemployment compensation, earned income tax credits, child tax credits (prepaid), and dependent care assistance (refundable). There are also tax treatments built in like the Economic Injury Disaster Loans (EIDL) advance, the restaurant revitalization grant, and student loan forgiveness.
Also, for your clients who are small business owners, don’t forget the small business lending options including the Paycheck Protection Program, EIDL (advance), and small business grants, namely from the Restaurant Revitalization Fund, and through the Shuttered Venue Operators Grant (SVOG).
Fact Sheet for the American Jobs Plan
Unlike the American Rescue Plan, which was released in March, as of mid-April the AJP has not yet been signed into law. While you can’t yet counsel your clients on the finalized plan, the White House has published a summary to help you prepare.
President Biden’s fact sheet reflects similar policy announcements from the campaign trail. One major section of the fact sheet focuses on the Made in America Tax Plan, which would increase the corporate tax rate to 28%.
The Made in America Tax Plan would also discourage offshoring by strengthening the global minimum tax for U.S. multinational corporations. It seeks to increase the minimum tax on U.S. corporations to 21% and calculate it on a country-by-country basis so it hits profits in tax havens. The law would further eliminate the rule that allows U.S. companies to pay no taxes on the first 10% of return when they locate investments in foreign countries.
Additionally, the fact sheet states the U.S. is now “seeking a global agreement on a strong minimum tax through multilateral negotiations” and proposes to “prevent U.S. Corporations from inverting or claiming tax havens as their residence.” The plan would deny deductions for offshoring jobs and provide a new tax credit for onshoring jobs. Furthermore, it proposes to eliminate the tax incentives in the Trump administration’s tax law for foreign derived intangible income (FDII) and apply a 15% minimum tax on “book income” for the largest corporations.
Lastly, the Made in America Tax Plan looks to eliminate tax preferences for fossil fuels and ramp up enforcement against corporations. Since your clients may run companies that could be impacted by the AJP, it’s your job to get them up to speed.
The American Families Plan
Some of your clients may already be aware that beyond the AJP, the AFP is also on the U.S. road map. Here again, you can advise your clients that there may be similar policy changes as announced on the campaign trail. These may include raising the tax bracket from 37% to 39.6%, expanding payroll taxes above $400,000/year, and eliminating the step-up basis for gains in excess of $1 million.
Taking Advantage of Tax Policy Changes
It has indeed been a roller coaster of a year, and now more than ever your clients will rely on your expertise to not only guide them through the loopholes, but also help them come out on top. However, many tax and accounting professionals are themselves overwhelmed with all of the changes and are grappling with how to best help their clients. That’s where a solid tax planning system comes to the rescue.
You may be pleased to learn that you no longer have to struggle with pen, paper and your calculator or wrestle with endless spreadsheets to create tax plans. Today, tax planning software can do the heavy lifting for you, even producing polished tax planning proposals and deliverables for your clients.
Tax planning software has all of the calculations and projections that you need built in. For example, you can toggle between current law and President Biden’s plan and build proactive, multi-entity, multi-year tax plans for your clients.
So while it’s going to be a wild ride for other tax professionals, you can rest easy, knowing you are in a unique position to help your clients make decisions that will positively affect their tax position. By expanding your tax planning services during a time of uncertainty, you’ll be helping your clients and cashing in on a huge opportunity for your firm.