What does the Biden presidency mean for your financial plan?
December 8, 2020
By Kevin Schmitt, CPA, CFP® | Vice President
Josh Miller, CPA | Senior Tax Manager
2020 has been a year like no other, and the recent presidential election definitely fit with that theme. Now that we are past the political chaos of the last few months, we are looking forward to the future and know that one of the biggest questions in our clients' minds is: What does the Biden presidency mean for tax rates?
President-elect Biden has proposed some notable changes to both individual and business tax policy, but the real question is whether the Senate will remain in control of the Republicans through the upcoming Georgia run-off elections and through the next mid-term elections in 2022. If Republicans retain control of the Senate, major tax rate changes in the next four years are unlikely. If they do not and Democrats occupy a majority of the Senate seats by 2022, you can expect tax rate changes for both individuals and businesses.
Tax on individuals
The maximum individual income tax rate is currently 37%. This rate, along with many other provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) affecting individual taxpayers, will sunset in 2026 and reset to 2017 rates if no further legislative action is taken. Biden campaigned on a plan to return this top rate to 39.6% for incomes over $400,000 and to eliminate the 20% qualified business income (QBI) deduction for those over that $400,000 threshold.
Currently, long-term capital gains and qualified dividends are subject to 20% tax for individuals who earn over $441,450 and married couples who earn over $490,600 per year. Biden has proposed eliminating the preferential rate for long-term capital gains for taxpayers with incomes exceeding $400,000 as well as on qualified dividends for those with annual income exceeding $1 million. (Thus, defaulting to the 39.6% tax rate.)
Biden has proposed to raise the child tax credit from $2,000 to $3,000 per child and increase eligible child care expenses for the dependent care credit from $5,000 to $16,000 per family. Additionally, he intends to establish a $15,000 refundable credit for first-time homebuyers and a renter's tax credit for low-income taxpayers.
Lastly, the estate tax exemption is currently up to $11,580,000 per individual and all inherited property is granted a step-up of cost basis to fair market value. Biden has proposed reducing this exemption to $3,500,000, increasing the estate tax rate from 40% to 45% and eliminating the step-up in basis on inherited property.
Tax on businesses
The corporate tax rate in the U.S. is currently set at a flat 21% and Biden plans to increase this rate to 28%. Also proposed is a 15% minimum tax on book income for companies reporting more than $100 million in domestic revenues, a 10% tax penalty for companies moving manufacturing operations overseas (in addition to a 10% surtax if a U.S. company would sell offshore production within the U.S.) and a 10% tax credit for companies creating domestic manufacturing jobs. How these additional taxes and credits would be calculated remains to be seen.
In his campaign, Biden proposed to take specific aim at real estate - an industry that has benefitted from several specific and targeted tax incentives in recent years. Among these proposals are eliminating like-kind exchanges (which are currently only allowed for real estate assets) and the QBI deduction for real estate investors as well as the use of real estate losses to offset other income.
We don't know if or when President-elect Biden will be able to implement these tax proposals. We do know that changes, if put in place, will have a significant effect on many taxpayers. It's critical individuals and business owners meet with their tax consultant as soon as possible to analyze possible outcomes of these proposals and understand how the changes would affect their tax burden, long-term succession and estate planning.
This article was previously published in the Tri-State Business Times.