Biden’s tax law proposal
The purpose of this article will be to discuss some of the possible changes to our tax laws as a result of Joe Biden’s victory in the recent Presidential Election and the resultant implications for tax planning at the end of this year. The individual tax rate structure was reduced by the Tax Cuts and Jobs Act of 2017 (TCJA). Under this law, the current highest marginal tax rate in 37 percent. This rate would apply to taxable incomes exceeding $523,600 in 2021. President-elect Biden has proposed increasing this highest rate to 39.6 percent, which was highest marginal tax rate prior to the TCJA. President-elect Biden further indicated that only taxpayers with incomes over $400,000 would see an increase in their income taxes. These two statements taken together make it unclear as to what income level the highest proposed rate would begin to apply.
Long-term capital gains and qualified dividends are currently taxed at lower rates than ordinary income. Specifically, these items of income are currently being taxed at rates of 0 percent, 15 percent, or 20 percent depending on the amount of an individual taxpayer’s income. President-elect Biden has proposed an increase in the top tax rate for taxpayers earning mor than $1,000,000 annually. The proposed rate would essentially double to more than 40 percent. Presidentelect Biden has also proposed eliminating the stepup in basis on capital gain property in a decedent’s estate. This change would mean that heirs would no longer receive this type of property free of a possible future tax liability.
Prior to the TCJA total itemized deductions were limited for high income taxpayers. For example, in 2017, taxable incomes of $318,700 for taxpayers filing jointly and $156,900 for single taxpayers were subject
to the rules limiting itemized deductions. The TCJA eliminated these limitations for all taxpayers. Presidentelect Biden has proposed reinstating the limitations on taxpayers earning more than $400,000 annually.
Tax credits reduce a taxpayer’s liability on a dollar-for-dollar basis and thus are more valuable to the taxpayer than a similar amount classified as a tax deduction. Further, a refundable credit is one that may reduce the taxpayer’s liability to zero and result in the tax refund check to the taxpayer for the balance. Under the current tax law there is a Child Tax Credit of $2,000 each qualifying child under the age of 17 and a $500 credit for other dependents. This credit is only partially refundable to the if certain conditions are met. President-elect Biden has proposed a credit of $8,000 for one qualifying child and $16,000 for two or more qualifying children. Further, under Biden’s proposal, this credit would be fully refundable. In addition, Biden has proposed expanding the Earned Income Credit and the Dependent Care Credit.
Under TCJA the corporate tax structure was reduced almost by half and the alternative minimum tax on corporations was eliminated. Currently, the corporate tax rate is a flat 21 percent. President-elect Biden has proposed increasing the rate to 28 percent and reinstating the alternative minimum tax on corporations with profits of $100,000,000 or more.
The TCJA instituted the Qualified Business Income deduction (QBI) on non-corporate business entities. Generally, this deduction is equal to 20 percent of the entities qualified business income. President-elect Biden has proposed phasing out the QBI deduction for incomes over $400,000. Finally, Biden has proposed forgiving $10,000 of student loan debt for each taxpayer. Recently, there has been talk about a Congressional resolution that would forgive student indebtedness for amounts as high as $50,000.
One can conclude from the above noted proposals that the intent of the incoming Administration will be to increase the tax liability for wealthy taxpayers. It would further appear that wealthy could be defined, in this context, as taxpayers with incomes of $400,000 or more. It must also be emphasized here that these are all currently proposals and not enacted tax laws. Given this caveat, tax planning must be done on a situation specific basis. That is, for a given anticipated transaction, the wise taxpayer should determine the tax cost under the current tax law and again under the proposed new tax rules likely to become law. Then, the probability of the various scenarios must be considered. This is obviously a complex process that should be undertaken by a tax professional. If a taxpayer is contemplating a financial transaction of significance in the near future, the taxpayer would be wise to consult their chosen tax professional before entering in the transaction.