If the Democratic Tax Bill Passes, Will It Be Retroactive To January 1, 2021?

When Joe Biden won the 2020 presidential election there was a belief among a wide swath of tax pundits that a tax increase was coming, possibly an estate tax increase as well as an income tax increase.

What we have learned over the past five months is that the Democrats are not necessarily a united group when it comes to the core issues, which seem to boil down to taxes, voting rights, immigration and the filibuster.

While we can’t predict the future, we can try to shed some light on one of the most significant issues for many: the effective date of any increase in the long-term capital gains tax rate.
Put another way, if Democrats enact a tax increase in the second half of 2021, how likely is it that the effective date of the tax increase will be January 1, 2021?

Well, let’s go to the tape and see what has happened in the past when the circumstances were similar. For those of you too impatient to read further without knowing the answer to that question, here it is: “There have been several instances in the last 25 years when a new tax act was made retroactive to the first day of the year in which it was enacted.” However, and this is a big “however,” in each one of those situations, the retroactive change was a tax reduction.

There have been no retroactive situations in the last 25 years where the Tax Act increased taxes and the effective date was prior to the date of enactment. Why might that be the case? One logical explanation is that tax increases are wildly unpopular and one way to make the tax more palatable is to delay its implementation and give the public some advance warning so that they can arrange their affairs around the effective date.

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So what happens this time? My guess is that since the Democratic “majority” is so thin, there is little chance any tax increase will be made retroactive to January 1, 2021. The later in the year that a Democratic tax bill (if any) is passed, the less likely it will have any retroactive effect.
Dysart Taylor shareholder/director H. Joseph Price Jr. helps businesses and individuals plan for their future through estate planning, tax planning, business succession planning and wealth preservation. He may be contacted at  [email protected].

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