What To Expect: Potential Tax Implications of a Biden Presidency
As the incoming Biden administration begins to execute plans, make announcements, and appoint Cabinet positions, there is much anticipation about potential tax law changes and updates. While on the campaign trail, President Biden laid out a detailed tax plan. And on Jan. 14, Biden announced his plans for additional economic relief in his American Rescue Plan. It’s important to note that none of these ideas have been proposed to Congress yet, nor have any currently applicable laws changed. Ultimately, the final tax plan that the president unveils as a prospective law may be much different from his initial campaign proposal. However, awareness of these ideas gives business owners a good indication of what the new administration finds to be important and relevant.
American Rescue Plan
The American Rescue Plan is very broad. The plan incorporates several components of the president’s tax plan, however, the majority of the potential provisions are not tax focused. Instead, the provisions are focused on coronavirus relief and vaccination plan roll-outs. We will share more information and analysis in the coming weeks once there is legislative text that provides more detail.
Biden Tax Plan
The Biden tax plan unveiled during the presidential campaign focuses on several components that could increase taxes for high-income earners. The proposed plan recommends increasing the highest tax bracket, imposes a new 12.4% Social Security payroll tax for wages over $400,000, eliminates the step-up in basis on death when assets are inherited, and removes preferential capital gains rates for taxpayers with over $1,000,000 of income. However, the plan aims to help individuals with lower income by increasing the child tax credit and dependent care credit, as well as the earned income tax credit.
The plan also repeals some of the business-focused initiatives passed as a part of the Tax Cuts and Jobs Act of 2017 (TCJA), including increasing the corporate rate to 28%, establishing a corporate minimum tax based on book income, and doubling the tax rate on GILTI income from foreign corporations.
The Biden tax plan reverts the top income tax rate to 39.6% (currently at 37%) for taxpayers with more than $400,000 in taxable income. As the 35% rate currently applies to those with income over $400,000 for married filing joint or over $200,000 for single, head of household, and married filing separate status filers, the income levels associated with the remaining tax brackets would need to shift in order to keep Biden’s promise to only increase taxes on top earners.
Capital Gain Rates
Biden proposes to eliminate the preferential rates on capital gains and qualified dividends for taxpayers with income of more than $1,000,000 and subject such income to the highest ordinary rate (39.6%). The net investment income tax rate would remain at 3.8%.
Current tax law allows for an increase (step-up) in the basis of inherited assets to the fair market value at the date of death of the original owner. The stepped-up basis prevents the new owner from being taxed on wealth accumulated during the life of the original owner.
Additionally, there is a lifetime gift and estate tax exemption of $11.7 million of total estate value for 2021 ($11.58 million for 2020). Under current law, the top tax rate is 40%, and after 2025, the lifetime exemption amount reverts to $5 million. The Biden tax plan proposes eliminating the ability to step-up, increases the top tax rate to 45%, and reverts the estate tax exemption amount to the 2009 lifetime exemption of $3.5 million.
Credits and Deductions
- Earned Income Tax Credit (EITC) – The Biden tax plan would expand the EITC to older workers that do not have a qualifying child. Currently, this credit is only available to individuals under the age of 65. This is included in the American Rescue Plan.
- Childcare Credit – The Biden tax plan proposes increasing the maximum credit for childcare expenses to $8,000 for one child and $16,000 for two or more children (currently it’s $3,000 for one child or $6,000 for two or more children) and making the credit refundable. Costs eligible for the credit would include up to half of the family’s spending on childcare for children under the age of 13 (for families making less than $125,000 with partial credit for families making between $125,000 and $400,000). This is included in the American Rescue Plan.
- Child Tax Credit – Biden’s tax plan calls for this credit to increase to $3,000 per child for children (ages 6 to 17) and $3,600 for children under 6 for 2021 or as long as economic conditions require. Additionally, it would make the credit fully refundable. This is included in the American Rescue Plan.
- Family Caregiving – The Biden tax plan would enact a new $5,000 tax credit to support costs incurred while caring for family members, including the elderly and those with disabilities or chronic health conditions.
- State Income Tax Deduction – The TCJA limited the itemized deduction for state and local taxes to $10,000. The Biden tax plan would support the House-passed HEROES Act provision to remove this cap.
- Student Loan Forgiveness – Biden’s plan proposes that student loans would be forgiven, tax-free, after borrowers have been enrolled in the income-based repayment plan for 20 years.
- First Time Homebuyer – The Biden tax plan calls for creating a new refundable, advanceable tax credit of up to $15,000 to assist with buying a first home. The credit would be paid upon the purchase of the home and not when filing the tax return. Additional housing credits are also being considered including credits for rehabilitating distressed properties and limiting rent and utilities for low-income households that qualify.
- Itemized Deductions – The Biden tax plan would cap the tax benefit of itemized deductions to 28% for those with taxable income of more than $400,000. In addition, the plan would restore the Pease limitation for taxable income above $400,000 by reducing the value of certain taxpayer’s itemized deductions by 3% for every dollar of taxable income over the threshold.
Qualified Business Income
The TCJA created the qualified business income deduction (QBI) which allows taxpayers other than C corporations to deduct 20% of qualified business income as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnerships income. The Biden tax plan would end special qualifying rules, including those for real estate investors. Additionally, it would only allow a deduction for taxpayers with taxable income of $400,000 or less.
Under current law, payroll taxes to support FICA (Social Security) and Medicare are paid in equal parts by both an employer and employee. FICA tax is limited to the first $137,700 (for 2020) of wages where the Medicare tax is not limited. Biden proposes to expand FICA taxes to apply again once wages exceed $400,000. However, wages between the first limitation wage base and less than $400,000 would not be subject to the additional FICA taxation.
Corporate Tax Rates
The Biden tax plan suggests instituting a 28% flat tax (under current law it’s 21%) and instating a 15% alternative minimum tax rate for companies which have zero or negative federal income tax liability but report more than $100 million in book income. Additionally, the plan looks to institute a 10% offshoring penalty surtax on the profits of companies that use foreign production for products that will be sold in the U.S.
Credits and Incentives
- New Market Tax Credit – The Biden tax plan would expand the new markets credit program to permanently provide $5 billion in support each year.
- Work Opportunity Tax Credit – Under the Biden tax plan, the work opportunity tax credit would be expanded to include military spouses.
For tax years after Dec. 31, 2017, the TCJA repealed the domestic production activities deduction, which offered up to a 9% deduction for the sale of goods manufactured in the U.S. Biden has proposed establishing a new manufacturing communities credit for the next five years to aid struggling businesses that experienced significant workforce reduction.
- Like-Kind Exchanges – Under the current law, taxes on gains of real property may be deferred if the proceeds are invested in similarly or that of other like-kind property. The Biden tax plan might repeal or further limit the like-kind exchange rules.
- 199A Deductions and Real Estate Losses – The Biden tax plan proposes ending qualified business income deductions (Section 199A) for real estate investors as well as preventing investors from using real estate losses to lower their income tax bills.
Global Intangible Low-Taxed Income
The TCJA instituted an effective minimum tax of 10.5% on the global intangible low-taxed income (GILTI) of U.S. corporate shareholders invested in controlled foreign corporations. The Biden tax plan would raise the minimum GILTI rate to 21% and apply to all income earned by the foreign corporation.
Qualified Opportunity Zones
The TCJA created the Qualified Opportunity Zone (QOZ) regime. Under this system, taxpayers may defer capital gain income by investing the gain in a Qualified Opportunity Fund.
The Biden tax plan would retain QOZs, but revise the regime in multiple ways:
- New focus on incentivizing Opportunity Funds to partner with non-profit or community-oriented organizations that are working to create jobs for low-income residents and provide a direct financial impact to households within the designated opportunity zones.
- Direct the Department of the Treasury to review the opportunity zone benefits to ensure that the zones are only being allowed in areas where there are clear economic, social, and environmental benefits to a community and not just high returns.
- Introduce transparency by requiring Opportunity Fund participants who are receiving benefits to provide detailed public reporting of their investments as well as the impact of the QOZ regime on those who live within the zone. Impact would be measuring effects on areas such as poverty and income status, affordability of housing, and job creation.
Other Tax Proposals
There is no corresponding current tax law for the following provisions:
- Pharmaceutical Companies – The Biden tax plan would impose a tax penalty on drug manufacturers that increase the costs of their drugs in excess of the general inflation rate. Additionally, pharmaceutical corporations would lose the right to deduct expenses for direct-to-consumer advertising.
- Childcare Construction Tax Credit – The Biden tax plan proposes creating a new childcare construction credit to encourage business to add childcare facilities at workplaces. Employers will receive a credit of 50% of the first $1 million of construction costs per facility.
- Made in America Tax Credit – The Biden tax plan would create a 10% tax credit for companies that create jobs for American workers. It would be available for revitalizing closed or nearly closed facilities, retooling or expanding facilities, bringing production or service jobs back to the U.S., and creating U.S. jobs. It would also benefit companies that increase manufacturing wages above the pre-COVID baseline for jobs paying up to $100,000.
What This Means for Taxpayers
When analyzing the impact of presidential elections and potential changes, taxpayers need to look at both their short- and long-term financial plans. For individuals, thinking about succession and estate planning becomes critically important. If these plans become reality – and again, there is no guarantee or expectation that the aforementioned proposals will become law – many existing estate plans may need to be analyzed to determine if they are still efficient from a tax planning perspective. For businesses, considering the changing tax rates as well as the availability for new or increased tax credits and deductions becomes increasingly important as they consider their long-term financial success and viability.
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