No matter how you feel about the presidential election results, it’s highly likely that you will see some changes in your future tax calculations and resulting tax bill – especially for my wealthier clients.
Let me preface this BLOGPOST, by saying that nothing written below is etched in stone.
These are simply Joe Biden’s wish list. He will have pressure from the more liberal side of his party to tax more and have more entitlements. Depending upon what happens in the two Georgia Senate races, we’ll see how much of it he’ll actually be able to get Congress to put into law.
It’s also unclear when any new laws would come into being (presumably 2021) but more importantly, will they be made retroactive to January 1st, 2021, have phase-ins, or whatever. But for my higher income clients – we need to begin PLANNING now for higher tax bills in the near future.
To be sure – no matter what parties are in control over the years to come, our country has a HUGE MATH problem. We spend more than we tax. Even before COVID, our federal debt was $22 TRILLION to begin 2020. Today it’s getting closer to $27.3 TRILLION.
It won’t be too many years before the interest on the debt alone takes up the largest part of tax revenue.
President-elect Joe Biden’s tax plan includes the following individual income tax, payroll tax, corporate tax. estate and gift tax changes:
- Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent. I’m assuming this income is for married filing jointly, but I haven’t seen that written so far. No mention of any changes to the 3.8% additional tax on investment income for those over $200,000 AGI (single) or $250,000 AGI (MFJ). It remains to be seen how much he will tinker with the tax brackets and the Trump standard deductions. Caps 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 percent would face limited itemized deductions. And restores the “retired” Pease limitation on itemized deductions for taxable incomes above $400,000.
Keep in mind that Congress has 3 major “tax levers”: tax rates, tax brackets and tax deductions. All of which can be changed with the stroke of a pen.
- Eliminates step-up in basis for capital gains taxation So folks who inherit property will have to pay capital gains on all gains (carryover basis). This would affect Americans of ALL income levels and we should look at planning opportunities.
- Eliminate capital gains treatment on qualified dividend income (from stock dividends). Dividends would then be treated as ordinary income instead of the current law being taxed at capital gains rate.
Middle America won’t like this one either as many middle Americans paid as little as a 0% capital gains rate (for those in the 12% and 15% marginal tax brackets).
- Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million.
- Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed. So taxable income over $400,000 would in effect pay a 12.6% FICA surcharge (self-employed) or split equally between employer and employees for those who work for a company.
- Phases out the Qualified Business Income Deduction (QBI) (Section 199A) for filers with taxable income above $400,000.
- Expands the estate and gift tax by restoring the rate and exemption back to 2009 levels. So, estate taxes would be due on inheritances of about $5.9 million per person ($11.6 mil per couple). Even for couples over the $5.9 mil exemption, we should look at planning opportunities.
- Expands the Earned Income Tax Credit (EITC) for childless workers aged 65 and over. Provides unspecified renewable-energy-related tax credits to individuals.
- 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.
- For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
- Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers. If their tax due was under $15,000, the government would write them a check for the difference!
The Biden plan also includes the following proposed tax changes on businesses:
- Increases the corporate income tax rate from 21 percent to 28 percent. That’s the big change for most business clients – many of whom changes from S-Corp to C-Corp under the Trump tax laws.
- Offers additional tax credits to small businesses for adopting workplace retirement savings plans for their employees.
- Expands 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. His plan would also end tax subsidies for fossil fuels.
Let’s do some TAX Planning, OK?
all the best… Mark
