How individual and business tax rates, credits, and more may change in the Biden presidency
In his 2020 campaign platform and other venues, President-elect Joe Biden outlined a number of potential tax changes. Given the uncertain makeup of the Senate as of this writing, it is not clear which, if any, of the proposals will make their way through Congress. We know that the new administration has pledged to tackle the pandemic first in 2021 with major CARES-type legislation, and we expect a second bill next summer addressing tax changes.
Read on for a summary of notable potential tax changes proposed or supported by the Biden campaign, according to the campaign site and a Tax Foundation analysis of Biden’s tax plan. Note that these plans are subject to evolution and interpretation; we will continue to share alerts and updates on tax-pertinent developments as they unfold.
Potential tax changes impacting individuals
- Individual tax rate increased: The top individual tax rate (for taxpayers with income greater than $400,000) would be increased from 37% to 39.6%. This would revert the maximum individual tax rate to its pre-Tax Cuts and Jobs Act (TCJA) threshold.
- Itemized deductions: Itemized deductions would be limited for taxpayers with over $400,000 in income so that the effective tax rate of these high-income taxpayers would not go below 28%.
- Section 199A phased out: The qualified business income deduction (Section 199A) would be phased out for individuals with income over $400,000.
- Tax rates increased on certain long-term capital gains and qualified dividends: Taxpayers with more than $1 million in income would be taxed at the ordinary income rate of 39.6% on any long-term capital gains or qualified dividends.
- Tax credits: The new administration would also make changes to various tax credits, including: reinstituting the First-Time Homebuyer’s Tax Credit (up to $15,000 to first-time homebuyers); expanding the Child and Dependent Care Tax Credit by increasing the maximum reimbursement rate from 35% to 50% and increasing the maximum qualified expense amount from $3,000 to $8,000; and expanding the Earned Income Credit and the Child Tax Credit.
- Tax credit for retirement accounts: The potential tax plan may also provide a refundable tax credit instead of a deduction for contributions to traditional retirement accounts.
- Estate and gift tax changes: Tax rates on estate and gifts would be increased from 40% to 45%. In addition, any assets inherited from a decedent would no longer receive a step-up in basis. There has also been discussion around reducing the exemption threshold to $3.5 million (from $11.58 million per individual).
Potential tax changes impacting businesses
- Corporate tax rate increased: The corporate income tax rate would be raised from 21% to 28%.
- Surtax imposed on corporations that offshore jobs: Corporations that place manufacturing or service jobs offshore to then sell products or services back to the U.S. would be subject to a 10% surtax on such activities, making the effective tax rate on such activities 30.8%.
- Minimum book income tax on corporations: Corporations with $100 million or more in book income would pay the greater of the corporation’s regular income tax or a 15% minimum tax. This minimum tax would allow for the use of foreign tax credits and net operating losses (NOL).
- GILTI tax doubled: The minimum tax rate on Global Intangible Low Tax Income (GILTI) imposed on owners of certain foreign entities would be raised from 10.5% to 21%. Biden would also remove the exemption for deemed returns below 10% of the qualified business asset investment (QBAI) amount.
- Payroll tax increased: The Social Security tax would be increased to 12.4% for individuals making more than $400,000. This amount would be split equally between employers and employees. Wages between $137,700 and $400,000 would continue to be exempt from payroll tax.
- Tax credits: Numerous tax credits would also face changes, including:
- Expanding various renewable-energy tax credits, the Low-Income Housing Tax Credit, and the premium tax credit of the Affordable Care Act;
- Expanding and making permanent the New Markets Tax Credit; and
- Creating a Manufacturing Communities Tax Credit to assist businesses impacted by layoffs or government closures; tax credits related to retirement savings plans for small businesses; and a “Made in America” tax credit for certain activities aimed at restoring, revitalizing, or expanding certain businesses domestically.
Biden’s election promises change on many fronts, and the tax landscape is no exception. Given the uncertain makeup of the Senate, and the many other pressing needs the country has to attend to, it is not clear what proposals would be pushed forward or when that would happen. Irrespective of whether any changes are made, many of the temporary tax changes enacted as part of the TCJA will reverse at the end of 2025, and it seems that taxes will increase on higher-income taxpayers. Consult with your tax advisors to understand how you may be impacted. We will provide updates as information becomes available.
For more insights on post-election federal income tax planning and other factors that both businesses and individuals should think through as 2020 comes to a close and we look forward to 2021, register to download a recording of our year-end tax planning webinar.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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