Coming Tax Changes
Biden announces tax plan
President-elect Joe Biden released his tax plan before the election, promising to repeal some of the major tax changes from 2017. Due to the country’s current state, Congress’s first focus will be on more pandemic-related economic relief. It is likely that the Biden administration will not consider tax policy changes until later in the year. Even if tax changes are not passed until later in 2021, they potentially will be retroactive to Jan. 1, 2021, as we have seen happen in the past. Since the Republican Party did not maintain control of the Senate, it is likely that some of the major changes in Biden’s plan could be passed. Biden is expected to push for changes in the next two years before the 2022 mid-term elections. Overall, Biden has promised not to raise taxes on anyone making under $400,000 per year.
Biden’s tax plan includes several changes that impact individual taxpayers. The plan would reinstitute the top individual income tax rate to 39.6%, currently 37%. Additionally, Biden has said that capital gains and qualified dividends would be taxed at ordinary income rates for taxpayers with over $1 million in income. Currently, those taxpayers are subject to a rate of only 20% on these items. Social Security taxes on wages and self-employment income over $400,000 would increase while itemized deductions for those high-income earners would be phased out and further limited. Biden’s plan reduces the benefit of itemized deductions to a tax benefit of no more than 28% for these taxpayers. While like-kind exchanges are now limited to only real property transactions, Biden’s plan would eliminate all like-kind exchanges for taxpayers with income greater than $400,000. Finally, taxpayers making over $400,000 will see a 100% disallowance of the 199A deduction for qualified business income.
Corporations will see an increase in the current tax rate from 21% to 28%. In an effort to prevent profitable companies from paying little to no tax, a 15% minimum tax on book income will be enacted for corporations earning greater than $100 million.
The estate tax could also be impacted. Biden has proposed an increase in the current rate from 40% to 45%. His plan is to also eliminate the step-up in basis for property transferred at death while also reducing the estate tax exemption to the Pre- Tax Cuts and Jobs Act level of $5 million.
Another tax policy under scrutiny by Biden and the Democratic Party is the state and local tax deduction (SALT) cap of $10,000 put in place under the Tax Cuts and Jobs Act. This deduction cap adversely affects taxpayers in states with a highincome tax rate and has been a source of controversy since its enactment. Due to the large amount of revenue generated by this cap on the SALT deduction, it may be hard to raise or eliminate the cap.
Biden has also stated that he would like to make other changes to help lower-income taxpayers. His plan includes increasing the minimum wage to $15/hour, forgiving some student loans for borrowers making less than $125,000, expanding Social Security, raising the child tax credit and dependent care credit, and also offering a $15,000 credit for new home buyers.
There is still much uncertainty surrounding when and if tax policies will be changed. You should talk to your CPA to see if there are options available to you that could help avoid potentially higher taxes if the Biden administration is able to make the changes they have proposed.
Contribution by Roy E. Prestwood, CPA (partner) and Malia M. Wollerson, CPA (director), representatives of Heard, McElroy & Vestal, LLC, 333 Texas Steet, Suite 1525, Shreveport, LA. 318-429- 1525.