Welcome to the New Year and our first Cadesky U.S. Tax Tip for 2021. Everyone here at Cadesky U.S. Tax hopes that you, and your loved ones, managed to keep safe (as much as possible!). It has certainly been an interesting start for 2021!
On January 5, 2021 the State of Georgia held runoff elections for their two Senate seats. Republican David Purdue and Democrat Raphael Warnock, led the respective popular vote held on November 5, 2020. However, under Georgia state law, unless a candidate has in excess of 50% of the vote (the state-mandated percentage share to be declared victorious), a runoff election must be held between the two top vote getters. Since neither Purdue (49.7%) nor Warnock (32.9%) surpassed the required 50% threshold, the runoff elections were mandated. Democrat Jon Ossoff defeated Republican David Purdue (50.6% to 49.4%) and Democrat Raphael Warnock defeated Republican Kelly Loeffler (51% to 49%).
What does this mean and why should I care?
In order for a piece of tax legislation to become law, the legislation must pass the House of Representatives, the Senate and then be signed into law by the President. Over the last number of years, votes in both the House and the Senate, have tended to be strictly on party lines. For example, the 2017 Tax Cuts and Jobs Act (P.L. 115-97) passed the Senate strictly on party lines with 51 Republicans voting Yea and 47 Democrats and 2 Independents voting Nay.
With the Democrats winning both Georgia run-off elections the Senate is now comprised of 50 Republicans and 50 Democrats (technically 48 Democrats and 2 Independents who caucus with the Democrats). As such, if all Senators vote on party lines, legislation will end up in a dead-lock.
When that happens, the President of the Senate has the deciding tie-breaking vote. The President of the Senate is the Vice-President of the United States. Kamala Harris, a Democrat became the US Vice- President on January 20th, 2021. As such, for the next two years, the 117th United States Congress will be under Democratic control as the Democrats also control the House of Representatives (of the 435 House seats, the Democrats currently have 222, the Republicans 212 with 1 seat vacant. The winner of the Louisiana 5th District, Republican Luke Letlow passed away from COVID 19 prior to taking office.)
With the Democrats now controlling Congress and the Presidency, it is possible that some, if not all, of President Biden’s tax proposals will become law.
What are some of President Biden’s tax proposals?
There are a number of provisions that should be of particular interest to our readers (we are not discussing all of the proposed changes, only those we feel would be relevant for our readers). These being
- Increase the top personal marginal tax rate from 37% back to 39.6% (the top rate before the enactment of the 2017 Tax Cuts and Jobs Act).
- Imposes a 12.4% Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees (6.2% each). This would create a gap in the current Social Security payroll tax, where wages between $142,800, the current 2021 wage cap, and $400,000 are not taxed. There is no limit on the Health Insurance (HI) portion, which is taxed at a rate of 2.9% (1.45% for both the employer and employee).
- Tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 % on income above $1 million. Currently the maximum federal tax rate on long-term capital gains and qualified dividends is 20%.
- Expand the estate and gift tax by reducing the estate tax exemption amount to, US $3,500,000. The current exemption amount, US $11,700,000, is scheduled to sunset as of December 31, 2025 but, if these proposals are passed, would revert much earlier and to a lower exemption amount.
- Possibly increase the top estate marginal tax rate from 40% to 45%.
- Eliminate the step-up in basis on death.
Some proposed corporate changes:
- Increase in the U.S. corporate tax rate from a flat 21% rate to a flat 28% rate
- Create a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15% minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
- An increase in the effective Global Intangible Low-Taxed Income (GILTI) rate from 10.5% to 21%
- Impose GILTI on a country-by-country basis (as such no cross-crediting of foreign tax credits);
- Eliminate GILTI’s exemption for deemed returns under 10% of qualified business asset investment (QBAI)
Potential impact of above corporate proposals
The potential changes to the U.S. corporate rate and the change to the GILTI provisions could have a significant impact on U.S. citizens who own shares in a Canadian controlled private corporation (CCPC) which has claimed the small business deduction. Under current law only 80% of the current year foreign (i.e., Canadian taxes) may be claimed as a foreign tax credit.
Assume we are making an IRC §962 election and we have an Ontario CCPC. The total Canadian taxes, on the first $500,000 of active business income would be 12.2%, of which 9.76% (12.2% x 80%) could be claimed as a foreign tax credit against the hypothetical U.S. corporate tax. With an effective GILTI rate of 10.5%, we would be able to eliminate most, but not all, of the GILTI tax. There would be a tax owing of 0.74%. (10.5%-9.76%), which may be manageable. However, with a potential increase in the GILTI effective rate to 21%, we would now have a potential hypothetical corporate tax of U.S. tax of 11.24% (this example is meant to be illustrative only).
It would appear that claiming the small business deduction may not be beneficial. Affected taxpayers may need to rethink how they own their Canadian businesses.
IRS WAY behind
The COVID-19 pandemic continues to play havoc with the IRS’s ability to timely process paper returns. On December 31, 2020, new National Taxpayer Advocate, Erin M. Collins issued her Department’s Annual Report to Congress. Such a report is mandated by IRC §7803(c)(2)(B)(ii).
Some interesting excerpts –
- Millions of taxpayers experienced lengthy delays in receiving their tax refunds (we have numerous clients who are still waiting!)
- Millions of taxpayers received late notices bearing dates that had passed and, in many cases, response deadlines that also had passed. During the time that the IRS was shutdown, some 31.2 million notices were automatically generated and issued but NOT mailed out.
- As of November 24, 2020, the IRS still had some 7.1 million unprocessed individual returns and some 2.3 million unprocessed business returns, with some dated as early as April 15th – more than seven month earlier.
- In fiscal year 2020, the IRS received 100.5 million telephone calls. Employees answered only 24 percent of calls, with hold times averaging 19 minutes. As the Taxpayer Advocate stated “Put differently, IRS employees did not answer more than 75 million telephone calls from taxpayers seeking help in complying with their tax obligations.” And you wonder why you can never get through! Though not stated in the Report we should note that the various 1-800 numbers do not work outside of the United States.
For those interested in reading the full report please go to
IRS 2021 Filing Season Open
On January 15, 2021 the IRS issued IR-2021-16 where they announced that the U.S. tax season will start on Friday, February 12, 2021. This is a later than normal date but was mandated because of late, December 27th, tax law changes. Filers of Form 1040NR, however, will not be able to e-file their returns until late March/early April as the IRS computer system is not yet able to accept these. Paper filed Form 1040NRs may be filed as of February 12, 2021. Given the delays in processing, however, it is questionable as to whether paper filing will actually result in any quicker refunds.
Who we are
Cadesky U.S. Tax Ltd. is a full service advisory and compliance firm. We monitor U.S. tax news that may be of interest to our readers and share our thoughts in U.S. Tax Tips. If you require our assistance please do not hesitate to reach out to us.