As tax documents fill your mailbox, you may wonder what will come of tax changes President Joe Biden promised during his campaign.
Biden recently unveiled many initiatives he plans to tackle in the coming days. They include improved vaccination distribution and an additional stimulus package. While tax changes were not revealed as top priority during Biden’s first 100 days in office, many believe it will be part of the budget reconciliation process this fall.
Budget reconciliation is allowed once per budget and requires a simple majority vote in the House and Senate to pass. This wouldn’t be the first time that budget reconciliation has been used to enact large tax cuts. It was done in 2001 and 2003 for the Bush tax cuts, as well as for the 2017 substantial tax reform.
Unlike most legislation, new tax law can be retroactive to January 1. We believe that Democrats would take a staggered approach, if given the opportunity, but some changes would begin in 2021. Explore some changes that we anticipate will affect higher-income taxpayers:
Individual Tax Rates
We are likely to see the top individual federal income tax rate return to 39.6% (up from 37%) for households earning $400,000 or more. This may disappoint many who were enjoying the reprieve on taxes. But historically, a top tax rate under 40% was unusual until the mid-1980s.
Corporate Tax Rates and Credits
On the campaign trail, Biden pledged to increase corporate rates to 28% from the current 21%. This would return rates halfway to their pre-2017 rate of 35%. In addition, he has proposed a new “minimum tax” of 15% on corporations with at least $100 million of annual income.
This plan to increase the corporate tax rate is estimated to raise $740 billion over the 10-year budget window and increase total tax rates on corporations by about 3%.
These tax increases would be tempered by incentives to encourage investment in the United States. Biden would like to create a new tax credit for certain businesses that promote revitalizing, renovating, and modernizing existing facilities if they benefit local workers and communities.
He supports a 10% “Made in America” tax credit for companies that invest in the U.S. He also would like to implement a “claw-back” provision to force companies to return public investments and tax benefits when they eliminate jobs in the U.S. and send them overseas.
Other Tax Changes
- Increase Social Security taxes: To help protect Social Security, Biden hopes to increase the amount of income that is subject to Social Security payroll tax. Currently, workers pay Social security tax on the first $142,800 of income. This may soon be expanded to include incomes as high as $400,000. Increasing the wage base for Social Security taxes has long been proposed as a method to strengthen this important program.
- Change tax advantages of itemized deductions: A plan to limit the tax benefit of itemized deductions to 28% for upper-income individuals would mean taxpayers who are in a higher tax bracket would not see a benefit above 28%. Eliminating the $10,000 cap on the state and local tax deduction is a possibility that would allow taxpayers in high tax states to deduct more of their state income tax. These potential changes would create planning opportunities for taxpayers who itemize.
- Increase capital gains taxes on wealthy individuals: For taxpayers with incomes about $1 million, capital gains may be taxed at ordinary income tax brackets instead of approximately 30% lower long-term capital gains tax rates. This is a big deal for people selling a business, a large piece of real estate, or a big block of appreciated stock. The impact of this might be mitigated through staggering sales over time into lower income categories or charitable giving strategies that help avoid tax.
- Eliminate capital gains “step up” at death: This has been much discussed over the years. If passed, taxpayers may be incentivized to pay more capital gains tax throughout their lifetimes to avoid a large capital gains tax after passing.
- Reduce federal estate tax exemption: It is likely the federal estate tax exemption will be reduced, potentially to $5M (or $10M for a married couple with the right planning). For those with larger estates, there may still be time to gift assets if the exemption amount is not updated for 2021.
- Eliminate some real estate tax breaks: Examples include like-kind exchanges that defer tax, large tax write-offs, and no longer allowing $25,000 per year in losses from rental properties for middle income real estate investors.
Biden’s plan also offers tax reduction for low- and middle-income taxpayers, some of which are being addressed in response to the coronavirus pandemic. These include increased child and dependent care tax credit, child tax credits, forgiveness of up to $10,000 of student loan debt, and special programs for first-time homebuyers and renters. In addition, Biden is increasing green energy tax credits.
Policy changes happen frequently, and tax changes are par for the course as of late. In fact, the 2017 tax changes were only slated to last until 2025. There are not many constants in the world of finance, and we work on our clients’ behalf to incorporate strategies that address both the opportunities and costs of new legislation. We are monitoring a variety of potential tax – and investment – changes on clients’ behalf.
- Bradford Tax Institute. History of Federal Income Tax Rates: 1913–2021.
- MarketWatch. 10 Biden tax plans that will sail through a Democratic-controlled Senate — and how to prepare for them.
- Kiplinger. President Biden’s Tax Plans for the Next Few Years.
- Center on Budget and Policy Priorities. Introduction to Budget “Reconciliation”.