Joe Biden campaigned for president on a vow to raise taxes for the rich and corporations so that they’d pay their “fair share” — a vow that made some affluent families game out various investment and estate planning scenarios.
That pledge was premised on a “blue wave” where Democrats kept the House of Representatives and established a newfound majority in the Senate, which would go along with tax hikes.
One week after Election Day, Biden is the projected winner in the presidential race. Yet Republican Senators fill 50 Senate seats and Democrats have 48 (including two independents who caucus with them). A Jan. 5 runoff elections for Georgia’s two spots.
Democrats will keep control of the House of Representatives, albeit in a smaller margin after GOP candidates flipped several seats.
So what does this political churn mean for families thinking about their tax bill in a Biden era?
Not as much as a clear Democrat sweep, some observers say, but still possibly plenty — like more audits for the rich, Internal Revenue Service rule changes and some legislative deals relating to retirement savings and families with kids.
“ ‘Sure, Biden might not get his laundry list of tax legislative priorities. But there is so much he can do just with staffing change at the IRS and Treasury, and regulations that move the ball forward on his agenda.’ ”
“Sure, Biden might not get his laundry list of tax legislative priorities,” said Caroline Bruckner, a tax professor at American University’s Kogod School of Business. “But there is so much he can do just with staffing change at the IRS and Treasury, and regulations that move the ball forward on his agenda.”
Others doubt Biden would rip up the rules, or they say he would do so at his peril.
But Jason Cain, chief wealth strategist with Boston Private, a private bank with almost $15 billion in assets under management, isn’t playing a guessing game.
The man with most of his clientele worth north of $50 million spent the fall and summer talking people “off the edge of the proverbial cliff.” At this point, “I think everybody’s taken a deep breath.”
But Cain expects more audits for top earners. “My advice to clients is, in that type of environment, we sure as heck better not be pressed up at the line between black and white.”
This means portfolios and tax planning built on “established positions supported by regulations, IRS procedure or case interpretation,” Cain said. “I don’t want my clients to be establishing precedent one way or another.”
Here are five ways Biden can still attempt to bring in more tax dollars from businesses and the well-off, while using the tax code to help those farther down the income ladder, with their benefits and pitfalls.
Expanding tax credits for companies, individuals and 401(k) contributions
“I think there are some very real opportunities,” said Mark Everson, a former IRS Commissioner who led the agency from 2003 to 2007, during George W. Bush’s administration. The coronavirus pandemic has underscored the importance of a domestic supply chain, said Everson, now vice chairman of alliantgroup, a tax consulting firm.
That means both sides of the aisle will weigh how they can expand company tax credits on research and development, as well as added incentives for manufacturing on American soil, he said.
Bipartisan deals might also come on expanded tax credits for families juggling work and kids, he said. That includes provisions like the Child Tax Credit, currently paying up to $2,000 per qualifying child, and the Child and Dependent Care Credit, now offering up to $3,000 in care expenses for kids and dependent adults or $6,000 for two or more qualifying dependents.
“ New tax laws could pertain to families juggling work and kids, and retirement savings. ”
“Things that promote work will be seen as worth considering,” Everson said.
The same goes for long-term financial planning. “There’s a lot of interest in both parties to do something to encourage people to save more for retirement,” said Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center.
There are already two bills with sponsors on both sides of the aisle. The “Securing a Strong Retirement Act” would, among other things, push the required minimum distribution to age 75. The “Retirement Security and Savings Act” would do the same in its list of provisions.
Then there’s Biden’s call for a 26% refundable tax credit kicking in for each dollar contributed to an IRA or 401(k).
Between all that, it’s possible Biden and lawmakers can find some common ground, he said. “Best case, some modest changes in 2021. Worst case is nothing, but I think that’s unlikely.”
Redefining who’s eligible for a tax break for low-income families
After Congress passes tax legislation and the president signs it into law, it falls on the Treasury Department and the IRS to develop the regulations that flesh out these laws.
That’s another place where the Biden administration could tinker — for better or worse depending on the perspective.
“ ‘There could be greater efforts at settling some the longstanding questions on the definition of a child for [Earned Income Tax Credit] purposes. There is room for substantial progress.’ ”
There could be greater efforts to settle some the longstanding questions on the definition of a child for Earned Income Tax Credit purposes. “There is room for substantial progress,” said Pete Sepp, president of the National Taxpayers Union, a conservative-leaning non-partisan think tank.
The credit for low- and moderate-income working families has been hailed as a powerful anti-poverty measure, but Sepp said there are unclear definitions on who can claim a child and get the credit. That results in too many audits, Sepp said, gumming up the payments for too many people in bad need of money.
That’s a place where some added direction could do some good, he thinks. There are places the Biden administration should leave alone, Sepp thinks.
The Trump administration’s Tax Cuts and Jobs Act of 2017 lowered the corporate income-tax rate and temporarily decreased most income tax brackets. It also established tax laws surrounding the money U.S. multinational companies made on intangible assets held abroad, like patents and copyrights. The Treasury Department spent three years after that crafting rules on the tax’s specifics, according to Sepp.
“ ‘It’s important to retain the independence of the IRS. For that reason I think the administration will tread carefully. I don’t think there will be a lot of regulatory changes.’ ”
Biden wants to raise the corporate rate from 21% to 28%, but if he can’t do that, Sepp said his Treasury Department could theoretically rip up the rules on multinationals and go tougher.
But that would be ill-advised, he said. In the face of uncertain tax rules, companies might hoard cash they’d otherwise use on new hires. “Wherever the tip of the spear is aimed, the wound spreads to many more taxpayers,” he said.
Everson stressed the IRS is a non-partisan agency following the laws as written. “It’s important to retain the independence of the IRS. For that reason I think the administration will tread carefully. I don’t think there will be a lot of regulatory changes.”
Making taxes simpler for gig workers
Some regulations are ripe for change and can make a real difference for gig workers, said Bruckner.
For example, the Treasury Department has a rule saying platform companies that connect consumers seeking a service and sellers offering their service (like a car trip) have to provide the seller with tax paperwork on earnings. But Bruckner says the Treasury Department insists on a rule saying the companies only have to pass along the tax documentation for payment that exceeds $20,000 and 200 transactions.
“ ‘It’s a really complicated issue, but it boils down to: The IRS can fix this. It doesn’t need an act of Congress.’ ”
That leaves a lot of workers in the dark on their tax obligations, Bruckner said, opening them up to audits and not giving the feds an accurate read on what the gig worker is paying into incomes taxes — and Social Security taxes, a number that, years later, will be used to determine the size of the worker’s Social Security checks.
“It’s a really complicated issue, but it boils down to: The IRS can fix this. It doesn’t need an act of Congress” to address a problem that’s “to the detriment of millions and millions of workers,” she said.
A Government Accountability Office (GAO) report dug into the issue earlier this year, and recommended a change in the rule at issue. IRS officials said they had to address “other priorities,” like rules and guidance on the Tax Cuts and Jobs Act, according to the GAO report.
Adding staff to an IRS that’s ‘limping’
Another way Biden can fit the tax code with his campaign visions: Helping the IRS itself, an agency that acknowledges it’s been losing staff over the years. The IRS had 78,004 workers in fiscal year 2019, which includes almost 1,600 more full-time workers than the year before, but that’s still “well below” staff levels in decades past, the IRS noted.
“You can pass all the policies you want. If the IRS can’t administer them, then you’ve just undermined your policy,” said Nina Olson, the former National Taxpayer Advocate within the IRS.
“ ‘If there’s one thing the CARES act has shown, it’s that the IRS is central to any economic recovery. Period. And we better make sure it can operate.’ ”
The IRS distributed more than 160 million stimulus checks after March’s $2.2 stimulus bill. “If there’s one thing the CARES act has shown, it’s that the IRS is central to any economic recovery. Period. And we better make sure it can operate,” said Olson, the executive director and founder of the Center for Taxpayer Rights, a non-profit organization promoting due process for taxpayers.
The IRS didn’t respond to a request for comment, but Olson said the agency is “limping” on matters like customer support and IT systems.
She said the tax-collecting agency needs a budget that slowly but surely increase over the years — and a breather after a 35-day government shutdown from 2018 to 2019 disrupted operations, and then the coronavirus’s complications this year.
In July, lawmakers in the House earmarked $12.1 billion for the IRS in fiscal year 2021, up from $11.5 billion a year earlier. The Senate’s Appropriations Committee has put aside $11.5 billion. The chambers will have to hash out the differences.
Some observers told MarketWatch they wouldn’t be surprised if the Biden administration wanted to stick with Charles Rettig, the IRS commissioner and a Republican who started in 2018 after a legal career defending individuals and businesses with tax disputes.
“If Biden wants more money for the IRS, better to have a Republican commissioner ask for it than a Democratic IRS commissioner ask for it,” said Gleckman.
Conducting more audits on wealthy taxpayers
More audits for the rich are likely a way the new administration will try to bring in more money, observers told MarketWatch. The government could have an extra $535 billion if audit rates return to their 2010 point and honed in on society’s 1%, according to one estimate.
Over the summer, the IRS announced plans to audit more wealthy taxpayers. But people like Olson and Everson say any future staff build-ups aren’t just a matter of more funding. It takes time and training, they said.
Someone auditing EITC claims might need to have the social skills to talk with taxpayers and understand family dynamics, said Olson. But someone scrutinizing the super-rich’s returns might have to know about forensic accounting and tax laws — and accounting firms will pay a lot to hire these types of people.
One thing Biden “can do is start talking about public-service jobs, and have it look valuable that you do a stint in IRS for a time. Yes, you take a hit on salary, you have but benefit of a government job,” Olson said.
It is wise for affluent households to keep thinking about additional tax planning in the years ahead, Cain said. Who knows what tax laws could come after the 2022 midterm elections, the 2024 presidential race and the 2025 expiration of the Tax Cuts and Jobs Act, he added.