Today’s Emerging Tax and Regulation Alert – November 12, 2020

A Review of Biden’s Tax Proposals

 

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With former Vice President Joe Biden expected to be the certified winner of the recent U.S. Presidential election, it is important to look ahead at the changes that Biden has proposed to introduce as soon as he is inaugurated. President-Elect Biden has pledged to make significant tax policy changes and eliminate many of the Tax Cuts and Jobs Act provisions enacted under President Trump. While we wait for the outcome of the remaining U.S. Senate races, we realize that a Republican-controlled Senate may be likely and that Biden’s tax proposals may remain in legislative gridlock for the foreseeable future. Alternatively, the Democratic Party may achieve a tie-breaking majority in the U.S. Senate and the implementation of significant changes to tax policy may be more imminent. In either case, we would like to make you aware of significant tax policy items that could be proposed under a Biden administration in 2021 and help you prepare and plan accordingly.

Overall, Biden’s tax proposals would impact high-income individuals and families the most, with increases to income tax rates, more phaseouts, and limitations on deductions, as well as higher estate and gift taxes. The following chart outlines these significant changes according to Biden’s current proposals:

Tax Policy Issue

Current Law

Biden Proposal

Tax rate on ordinary income

Top marginal rate is 37% until 2026 (if current law expires, top marginal rate reverts to 39.6% beginning in 2026)

Restore top marginal rate to 39.6% for taxpayers with over $400,000 of taxable income (it’s not clear as to how this relates to filing status)

Tax rate on long-term capital gains & qualified dividends

0% rate (income between $0 and $40,000, single filer)
15% rate (income between $40,001 and $441,450, single filer)
20% rate (income above $441,450)

Tax long-term capital gains and dividends at 39.6% for taxpayers with over $1 million of taxable income (and potentially for all taxpayers)

Tax rate on carried interests

If held at least three years, taxed at long-term capital gain rates

Tax as ordinary income

Itemized deduction cap

Itemized deduction limit repealed (the current law expires 1/1/2026, and the “Pease” limitation is reinstated)

Cap value of itemized deduction at 28% (rather than up to the proposed top rate of 39.6%), and reinstate the 3% Pease limitation for those with income above $400,000

High-income Social Security payroll tax

No Social Security payroll tax on income above $137,700 in 2020 (indexed to $142,800 for 2021)

Expand the 12.4% Social Security payroll tax to income in excess of $400,000

Pass-through trade/business income (§199A)

20% deduction

Implement a new phaseout for income over $400,000

Estate tax

40% estate, gift, and generation-skipping tax; basic exclusion is $11.58 million in 2020 (continued indexing); expires at the end of 2025

Return the exclusion to pre-TCJA amount of $5.49 million as adjusted for inflation (or possibly down to $3.5 million)
Repeal stepped-up basis at death

GILTI rate

10.5% rate

Double rate to 21%

Additional Biden Individual and Corporate Tax Proposals:

  • Tax credit up to $8,000 for childcare
  • Restore tax credits for residential energy efficiency and solar investment and expand tax credits for electric vehicle purchases
  • A renter’s credit to reduce rent and utilities to 30 percent of income
  • A credit of up to $15,000 for a first-time home buyer that could be received upon closing instead of when filing tax returns
  • Tax credit of $5,000 for informal caregivers
  • Equalizing tax benefits of retirement plans by proposing a 26 percent credit instead of allowing a deduction for amounts contributed
  • Increasing corporate tax rate from 21 percent to 28 percent
  • Imposing a minimum tax of 15 percent on corporations with $100 million or greater in book income
  • Removing like-kind exchanges on real estate for taxpayers with over $400,000 of taxable income (or entirely).

Start Planning Now!

Don’t wait until January 2021 to start formulating your plan for the next few years.  Whether or not we see a Republican-controlled Senate in 2021, we want to make sure that our clients are prepared for various scenarios. If you have any questions, don’t hesitate to reach out to your Topel Forman advisor, and if you’d like to be introduced to one of our tax advisors, contact us

© 2020

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