How Biden's Presidency Could Affect Your Tax Bill
The election of Joe Biden promises change on many fronts, and the tax landscape is no exception.
In his 2020 campaign platform and other venues, Former Vice President Joe Biden outlined a tax plan that would raise taxes on corporations and the top 1% of individual earners, while providing numerous tax breaks to moderate and lower-income families. His tax plan represents a significant departure from the policies and impact of major tax revisions proposed by President Trump and enacted in late 2017 in the Tax Cuts and Jobs Act, or TCJA. In fact, many of his tax proposals are based on repealing tax changes made in the TCJA (which expires at the end of 2025), and work from there with additional changes.
Here is a break-down a few of the notable tax proposals being discussed as part of the Biden tax plan.
Potential Tax Changes Impacting Individuals
Most aspects of the Biden tax proposal for individuals apply only to those taxpayers with taxable income over $400,000. Biden’s plan includes the following payroll tax, individual income tax, and estate and gift tax changes:
Tax Rates
Biden’s tax plan would revert the top individual federal income rate on ordinary income and net short-term capital gains back to 39.6%. This is the top rate that was in effect before the TCJA lowered it to 37% for 2018-2025. It is also assumed that Biden will favor allowing all temporary tax provisions to expire as scheduled (e.g., the TCJA’s individual income tax changes are set to expire after 2025).
Capital gains & qualified dividends have historically been subject to favorable capital gains tax rates. Under the Biden plan, individuals could face higher capital gains taxes as he has proposed to tax capital gains and dividends at the same rate as ordinary income for taxpayers with over $1 million in income. The assumption is that his proposal would add a fourth bracket for long-term capital gains and qualifying dividends (resulting in brackets of 0%, 15%, 20%, and 39.6%). With the 3.8% net investment income tax (NIIT) add-on, the maximum effective rate on net long-term gains would 43.4% (39.6% plus 3.8%). That would be almost double the current maximum effective rate of 23.8% (20% plus 3.8%)
Section 199A / Qualified Business Income Deduction
Biden has also proposed phasing out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000. As a result, owners of pass-through entities such as S corporations or partnerships with qualified business income of more than $400,000 would lose a 20% deduction enacted under the TCJA.
Itemized Deductions
Biden would also cap the tax benefit of itemized deductions to 28% of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28% would face limited itemized deductions.
He also plans to reinstate a phase-out of deductions referred to as the Pease Limitation on itemized deductions for taxable income above $400,000. This effectively reduces deductions on every dollar by three cents for top earners.
One change favored by many is that Biden proposes eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes.
Tax Credits
Biden proposes an extensive list of new or enhanced tax credits. Among them:
Child Tax Credit Temporary Increase: A temporary increase (which would expire after the economy recovers) in the child tax credit from a nonrefundable $2,000 per child up to age 16 to a refundable $3,600 per child up to age 6 and $3,000 per child up to age 17. A refundable credit is paid as a refund, even if the individual does not owe taxes.
Expanded Earned Income Tax Credit: Expands the Earned Income Tax Credit (EITC) to childless workers aged 65+; the credit currently isn’t available to these taxpayers.
Child and Dependent Care Tax Credit Increase: An increase in the value of the child and dependent care tax credit from a maximum nonrefundable $2,100 for two or more children to a maximum refundable $8,000.
New Credits for Homebuyers and Renters: Biden would create a new refundable tax credit of up to $15,000 for eligible first-time homebuyers. The credit could be collected when a home is purchased, rather than later at tax-return filing time. Biden would also establish a new refundable tax credit for low-income renters. The credit would be intended to hold rent and utility payments to 30% of monthly income.
Other Tax Credits and Incentives: The tax plan provides for several other tax credits and incentives targeted toward low- and middle-income families such as exclusion of student loan forgiveness from taxable income, tax credit for families renovating distressed properties, a tax credit for informal caregivers, and a variety of other tax credits focused on promoting energy efficiency.
Payroll Taxes
Top earners would also get pinched with an expanded Social Security tax. Under current law, the 12.4% Social Security tax hits the first $137,700 (for 2020) of wages or net self-employment income. Employees pay 6.2% via withholding from paychecks, and employers pay the remaining 6.2%. Self-employed individuals pay the entire 12.4% out of their own pockets via the self-employment (SE) tax. For 2021 and beyond, the Social Security tax ceiling will be adjusted annually to account for inflation. As things currently stand, the 2021 ceiling will rise to $142,800.
Biden’s proposal would restart the 12.4% social security tax on wages or net self-employment income earned above $400,000. This would create a “donut hole” in the current Social Security tax, where wages between the current cap of $137,700 and $400,000 are not taxed. Over the years, this “donut hole” will slowly close as the lower threshold rises toward the static upper threshold due to inflation.
Estate Tax
The president-elect has also proposed overhauling taxes around wealth transfers. His plan would entail two major changes to the federal estate tax.
Gift And Estate Tax Exemption Amount
Biden’s plan expands the estate and gift tax by restoring the rate and exemption to 2009 levels. The TCJA doubled the $5.49 million per person estate-tax exemption and adjusted it for inflation; now, any individual can leave an estate up to $11.58 million without incurring the estate tax. The figure is $23.16 million per couple. Biden plans to return the exemption to its 2009 level of $3.5 million per person and raise the estate tax rate to 45% from 40%.
Elimination Of Basis Step-Up For Inherited Assets
The second change would repeal the present “step-up in basis” rule that increases the tax basis for inherited assets to their full fair market value upon death. Under current law, the federal income tax basis of an inherited asset is stepped up to fair market value as of the decedent’s date of death. When heirs sell inherited assets, they only owe federal tax on the post-death appreciation.
Potential Tax Changes Impacting Businesses
Biden’s plan also includes the following proposed business tax changes:
Statutory Corporate Tax Rate
Most notably, Biden has proposed increasing the corporate income tax rate from 21% to 28%. It’s assumed that this means a single 28% corporate income tax rate rather than a graduated rate structure.
New Corporate Minimum Tax
He has further proposed creating 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.
Increase in the Global Intangible Low Tax Income (GILTI) rate
Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5% to 21%. In addition to doubling the tax rate assessed on GILTI, Biden has proposed to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10% of qualified business asset investment (QBAI).
Real Estate Industry
Biden’s plan suggests potential changes to the §1031 like-kind exchange provisions, as well as changes to effectively limit losses that may be utilized by real estate investors.
Other Tax Credits And Incentives
The Biden proposal also suggests:
Establishing a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
Expanding the New Markets Tax Credit and making it permanent
Offering tax credits to small businesses for adopting workplace retirement savings plans
Ending tax subsidies for fossil fuels while expanding several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit.
Other Proposals
Boosting the IRS
A tougher IRS under a Biden administration is also a strong possibility. Lawmakers on both sides of the aisle are thought to be amenable to more funds for the agency, as it was instrumental in distributing aid during the COVID crisis.
Beware that Federal Changes Are Still Just Proposed at this Point
Joe Biden may have won the presidency, but there is no guarantee that his tax plan will come to fruition intact as the President cannot raise or lower taxes on his own. In order to adjust taxes, Congress must pass legislation and then send the bill to the President for signature.
Major tax changes are much more likely to occur if there is a 50-50 Senate with Vice President-elect Kamala Harris as the tie breaker. That means the fate of Biden’s plans largely depends on the balance of power within the Senate, which will likely be decided following a January runoff election in Georgia. Should Republicans retain control of the Senate, the more aggressive components of the tax plan will probably not move forward any time soon.
The new administration has also pledged to prioritize tackling the pandemic in 2021 with major CARES-type legislation, so any bill addressing tax changes is unlikely to move forward until next Summer at the earliest. Since tax laws typically take effect in the calendar year after they are passed, even if Biden is successful in passing several proposed reforms, the effective date for most of the tax provisions will most likely not be before January 1, 2022.
We are following the Biden tax plan closely and are studying updates as they become available. Please reach out to your trusted advisors at The Doty Group with any questions and to discuss specific planning strategies and opportunities.