Democratic Presidential nominee Joe Biden has released a tax plan that could seek to increase taxes on high net worth individuals. Although it is a campaign platform, it provides insight into the intended direction and changes that could take effect.
Though it is Congress that writes tax and budget bills, so the House and Senate will have a say. If Biden is elected, tax policy outcomes will heavily depend on whether the Democrats capture a majority in the Senate (and the size of the majority).
In general, the available information about these proposals is limited. It’s clear that the overall plan will include a number of complete or partial repeals of President Trump’s 2017 Tax Cuts and Jobs Act (TCJA). It is also unknown when these proposals would take effect. It is commonly accepted that tax law changes passed late in 2021 can be expected to be retroactive to the beginning of the calendar year 2021. Taxpayers looking to plan around these changes should consider acting before the end of this year.
We’ll start with some potential Personal Income Tax Provisions and some opportunities to consider:
1. Long-term capital gain rates and qualified dividends would be taxed at ordinary income rates for taxpayers with more than $1 million in taxable income. This would eliminate the long-standing 20% preferred rate for long-term capital gains and qualified dividends for taxpayers in that highest bracket.
2. A Repeal Tax Cuts & Job’s Act’s tax cuts for taxpayers with income over $400,000. Taxpayers who are married filing jointly currently in the 35% and 37% brackets could see their rates increase to 39.6%.
3. Reinstitute the “Pease Limitations” on itemized deductions for taxpayers with income over $400,000 and cap the value of itemized deductions at 28% of value (AMT). Under current law, itemized deductions are not subject to this limitation — deductions are valued at the taxpayer’s top marginal rate.
4. The tax reform calls to eliminate the tax deductibility for 401(k)/IRA contributions and replace the deduction with a credit. The credit would be equal to the amount of the contribution multiplied by a fixed percentage (this fixed percentage would be lower, perhaps significantly lower than the high-income marginal rate). The idea here is to increase deductions for lower-income households while decreasing the deduction for higher-income households.
5. Eliminate stepped-up basis at death. With the Estate exemption potentially dropping it is unclear if this means that heirs will inherit the property at the decedent’s basis and potentially have large gains at a future sale or if death will trigger a taxable recognition event (potentially subject to the 39.6% rate).
6. Eliminate or limit Section 1031 Like-Kind Exchanges and other benefits for real estate used in a trade or business.
Potential Corporate Income Tax Provisions:
1. An Increase in the top corporate tax rate to 28% (from the current 21%).
2. Impose a 15% minimum tax on accounting profits for corporations with at least $100 million in revenue.
3. Increase tax rates on the profit of foreign subsidiaries of US companies.
4. A potential Phase out the “Qualified Business Income” Section 199A
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Note: The content contained on this piece is meant for general educational and informational purposes only and is not intended or designed to be specific tax, legal, financial or accounting advice. Please consult with a qualified professional regarding your particular situation.
