By DeEtte L. Loeffler
Now that the 2020 Election is over, the San Diego community should be aware of Proposition 19, which repealed the parent-child property tax exclusion except in very narrow circumstances. Other 2021 tax changes are discussed briefly below. Finally, some likely tax changes in 2021 are also raised.
2021 Tax Changes
Property Tax. The parent-child exclusion from property tax reassessment now applies only to transfer of a primary residence to a transferee who also uses it as a primary residence. Properties might get reassessed if the transferee ever moves out, unless another qualified transfer occurs.[i] Also, taxpayers over age 55, the disabled, and disaster victims can transfer their property basis upon sale to a new home anywhere in California (with some adjustments for higher value property).[ii]
Income Tax. Federal individual income tax rates remain unchanged; brackets rose, with top rates applying at $523,600 (single), $628,300 (married filing joint), and $13,050 (trusts/estates).
Business Tax. California suspended the first year of $800 franchise tax for new LLC’s, LP’s and LLPs formed in 2021 and 2022; for 2020-2022, suspended net operating loss deductions (but can carry-over up to 3 years) for businesses with over $1M in revenue; and capped business credits at $5M.[iii] Businesses can deduct on federal returns expenses paid using forgiven PPP loans[iv], but California disallows their deduction.[v]
Retirement. The requirement to take Required Minimum Distributions was suspended for 2020, but not for 2021.[vi]
Exclusions. The Exclusion from federal estate, gift and generation-skipping taxes increased to $11.7M; the annual gift tax exclusion remains at $15K.[vii]
Changes to Watch For:
Following the election, the Senate is now split: 50 Republican, 48 Democrats and two independents who usually vote with the Democrats. Without a clear majority, most bills will require a majority vote of 60 (or 10 Republicans in favor).[ix] The exception is bills that can be adopted through the reconciliation process that requires only a simple majority of 51%.[x] Under the Byrd Rule, only bills that change spending or revenues can be reconciled, so tax bills qualify but increasing the minimum wage does not.[xi] Tax bills can also be adopted retroactively.[xii] Because of the large financial costs of the pandemic, tax increases are more than likely to occur in 2021. See below for some potential changes:
Property Tax. Failed Prop 15 would have reassessed commercial properties to fair market value annually.
Income Tax. Federal taxes on those earning more than $400,000 (the top 1%) will likely increase. For them, the President proposes a top federal tax rate of 39.6%; additional Social Security tax withholding (with a doughnut of untaxed income between $142,800 and $400,000); phasing out the §199A deduction for income from pass through entities; capping deductions at 28%; and re-imposing the Pease limitation on deductions. For incomes over $1M, capital gains could be taxed at 43.4% (39.6% + the NIIT) which could affect home sellers in California. Also at risk is the loss of the basis step-up on assets at death under §1014.
Business Taxes. The President proposes raising the corporate tax rate from 21% to 28%; imposing a minimum 15% tax on business with over $100 M in “book profits” (used for financing); doubling the rate to 21% on global intangible low tax income (GILTI) earned by foreign subsidiaries of US companies; and imposing a claw-back of public funds spent on companies that move overseas. Employers would likely also pay increased Social Security taxes on wages over $400,000.[xiii]
Exclusions: The estate tax Exclusion will drop by half in 2026. The gift tax might be decoupled and reduced sooner to capture gifts pre-2026 gifts. Tax rates, could easily rise for both taxes.[xiv]
DeEtte L. Loeffler (dloeffler@mmpph.com), partner, Miller, Monson, Peshel, Polacek and Hoshaw, tax and estate planning.
[i] https://wwww.boe.ca.gov/prop19/#FAQS, Q3.
[ii] Prop 19, adding 2.1, 2.2 and 2.3 to California Constitution Article XIII A.
[iii] AB 85.
[iv] Bipartisan-Bicameral Omnibus COVID Relief Deal (reversed IRS Notice 2020-32).
[v] AB 1577.
[vi] Coronavirus Aid, Relief, and Economic Security Act.
[vii] Rev Proc 2020-45.
[viii] AB 2088.
[ix] Senate Rule 22.
[x] The vice president can cast the deciding vote.
[xi] The Budget Reconciliation Process: the Senate’s Byrd Rule, CRS Report for Congress dated 12/1/2020.
[xii] Constitutionality of Retroactive Tax Legislation, CRS Report for Congress dated 10/25/2012.
[xiii] Social Security cannot be reconciled under the Byrd Rule.
[xiv] See xii.