With the beginning of the new Democratic administration of Joe Biden in January 2021, one can expect legislative changes which are consistent with the political and economic agenda of any new administration. With respect to tax law, there is oftentimes modifications of existing tax laws, as well as enactment of new laws for the purpose of fulfilling campaign promises or reversing the policies of the previous administration.
Biden has already set forth tax proposals which may impact individuals and businesses. The below proposals are only in the discussion phase and the final tax bill may wind-up looking very different from what is being reported in the media and political circles.
Here is a short summary of proposed changes that may affect many Americans and businesses should the proposals become law:
- Biden would reverse the top rate for individuals and restore the 39.6% rate for taxable income above $509,300 for married filing jointly taxpayers and over $452,700 for single filers. Currently, it stands at 37%.
- With respect to Social Security taxes, Biden would maintain the 12.4% tax split that both employers and employees have to pay, and keep the $142,400 cap.
- When it comes to capital gains rate, especially for long term rates, Biden would eliminate breaks for long-term capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates. Currently, the long term rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax…which is currently in effect.
- With respect to estate taxes, currently the estate tax lifetime exemption for 2020 is $11,580,000. Certain transfers of appreciated property at death get a step-up in basis. The Biden proposal would return the estate tax to 2009 levels i.e. $3,500,000. He also proposes to eliminate the current step-up in basis on inherited assets, and eliminate the step-up at death provision for inherited property passed along by the decedent.
- With respect to any child care credits, Biden’s proposal would expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent. As it stands now, individuals can only claim a maximum of $2,000 Child Tax Credit (CTC) plus a $500 dependent credit (for dependents who are not a qualifying child).
- Itemized deductions phase out: For 2020 tax year, the standard deduction is $12,400 for single/married filing separately, $18,650 for Heads of Household and $24,800 for married filing jointly. Under Biden’s proposal, there would be a cap on any tax benefits of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold would only benefit from 28% of their itemized deductions.
- Currently, the top corporate tax rate stands at 21%. With the new proposal, Biden would raise the flat rate to 28% and reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax for entities with profits of $100 million or higher.
- With respect to the Global Intangible Low Tax Income (GILTI) tax on profits of overseas entities, Biden’s plan would double the tax rate on the GILTI earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
- In addition to this increase in the GILTI tax, there would also be a 10% penalty surtax on profits for goods and services manufactured offshore and a 10% advanceable “Made in America” tax credit to create U.S. manufacturing jobs.
- With respect to the current Qualified Business Income Deduction Sec 199A, businesses are currently allowed a 20% qualified business income tax deduction, which lowers the effective rate of tax for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses. Under Biden’s new proposal, this deduction would be phased out for those businesses making more than $400,000 annually.
The above are some of the primary changes which are open to legislative debate and enactment. The timeline is always subject to change, with really no specific date range for enactment of this agenda. There may be Congressional consideration at end of 2021, or we may all have to wait till 2022 for the Congress to take up any tax legislation, depending on the state of the economy and any geopolitical events going on in the world.
Please contact us if you have questions or need specific tax related advice about how to plan for 2021 and future years.
Disclaimer: This information has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this email was intended to be general in nature.