It seems like most years we say that year-end planning is especially important. Part of the reason for that is that Congress tends to enact tax law changes every year. However, making planning difficult, Congress also tends to put off passing tax legislation until the end of the year. At the end of 2017 it was the Tax Cuts and Jobs Act. At the end of 2020 it was the Consolidated Appropriations Act. And now, at the end of 2021, it might be the Build Back Better Act — and then again, it might not.
The Build Back Better Act has the potential to impact broad areas of tax planning: individual income tax planning, corporate income tax planning, pass-through income tax planning, international tax planning, retirement planning and estate planning. As this is being written, Congress is working on paring back the act from a $3.5 trillion bill to something that might be as low as $1.5 trillion to come up with something that the Democrats can pass without Republican support under the budget reconciliation process in the Senate.
A lot of those cutbacks could be in the non-tax provisions. Those tax provisions that cost revenue, such as the expanded tax breaks for low- and middle-income taxpayers, could also face cutbacks. The tax provisions that raise revenue are less likely to face cutbacks, since they help pay for everything else. However, with an estimated $2 trillion raised from revenue provisions, if the total package is reduced to $1.5 trillion, even some of the less controversial revenue-raisers could be reduced or eliminated if they are no longer required for funding.
There are a few specific objections to some of the revenue-raisers. Some Democrats object to the extent to which corporate tax rates are proposed to be raised. Some Democrats object to the elimination of all tax breaks for fossil fuels.
It is very difficult at this point to know what is likely to emerge as the final product, assuming they can get to a final product. However, once we know what a final product looks like, it may be too late to do significant year-end tax planning in response. Most of the provisions in the legislation have effective dates tied to the enactment date, Jan. 1, 2022, or even later. A few proposals, such as the capital gains rate increases, have retroactive effective dates for which it may already be too late to do year-end planning in response.
At this point it seems that the Democrats will somehow work out a way to compromise on their differences. The failure to enact anything would seem to be much worse for both the moderate and the progressive Democrats than coming away with at least part of what they want, but they may try to hold out as long as possible to try to get as much as they can.
It is difficult to do tax planning in anticipation of what might happen in Washington, but it may well be too late for tax planning after the fact. Tax advisors will want to at least make sure that their clients are aware of the potential issues and possible actions that could be taken, whether or not those clients decide to take action.
