Biden’s Tax Plan Proposals – A SummaryPosted on August 21st, 2020
A Summary of Biden’s Proposed Tax Law Changes
With the Democratic National Convention wrapping up tonight, I thought this would be a good time to send out a summary of the tax law changes that a Biden administration plans to propose. I see a lot of headlines reading something to the effect of “Biden Plans to Raise Taxes”, so I’m sure a lot of you wonder exactly what that means. In looking at the proposal he has put together, my high level takeaway is that most of the headlines are just incomplete sentences, and would be better stated as “Biden Plans to Raise Taxes on Corporations and on the Wealthy”.
Here are the key changes Biden is proposing:
Increase Corporate Income Tax Rate to 28%
- The current corporate income tax rate is 21%
- It was lowered from 35% to 21% as part of the Tax Cuts and Jobs Act (TCJA) two years ago
- Proposal is to raise the rate back up to 28%
Impact to Robert: None.
My Opinion: Corporations are so adept at tax planning that their tax rate rarely actually matters. 28% is still super low compared to recent history. I like that the 28% rate puts corporations back on par with pass through and individual business owners. Otherwise, over time, small businesses would not be able to compete with major Corporations that pay only 21%. It’s bad enough that the pandemic has tilted the playing field towards major corporations already. This one is a win for small businesses (i.e. my clients!).
Impose 15% Minimum Tax on Companies’ Book Income
- This creates an alternative minimum tax again for corporations
- Would apply only to companies with more than $100M in gross revenues
Impact to Robert: None.
My Opinion: No impact to our clients, so tax the major corporations all you want, Joe!
Double the Minimum Tax on Profits Earned by
Foreign Subsidiaries from 10.5% to 21%
- Existing tax is called the Global Intangible Low-Taxed Income (GILTI) Tax
- Aims to generate US revenue for patent, trademark, and copyright income shifted to foreign countries
Impact to Robert: None.
My Opinion: No impact to our clients, so keep taxing those major corporations all you want, Joe!
Restore the Top Individual Tax Rate to 39.6% (up from current 37%)
- Currently, individuals earning over $207K, and married couples earning over $415K, pay a marginal tax rate of 35%
- Currently, individuals earnings over $518K, and married couples earnings over $622K, pay a marginal tax rate of 37%
- Both above rates expire at the end of 2025 under current law, and those taxpayers will return to paying a top rate of 39.6%.
- Biden proposes the top rate of 39.6% kicks in now, rather than wait until 2026
- Taxpayers in the lower tax brackets will continue to have same tax rates, until those expire as scheduled, and in 2026 would go back to paying the same pre-TCJA rates also.
Impact to Robert: None. Those tax brackets are still out of reach for me, unfortunately.
My Opinion: This one would impact some of our clients, so it’s worth taking a look at. It is the same tax rates those folks were paying just 2 years ago (though they’d still get the benefit of tax savings on their first $415K of annual earnings), and these rates were already scheduled to go back up in 2026 anyway, so not as big of a deal as many articles highlight.
Phase Out S199A QBI Deduction above $400K of Taxable Income
- QBI allows a deduction of up to 20% of business profits for owners of pass through entities
- There are currently income limitations on this deduction, but only for those in “specified service trades or businesses” (SSTB) – think doctors, lawyers, accountants, athletes, entertainers, etc
- Biden proposes to limit the deduction for all business owners earning over $400K, regardless of business type
- This would impact trades, insurance brokers, engineers, manufacturing, real estate investors and realtors, etc, any business owners that don’t currently fall under the “SSTB” umbrella.
Impact to Robert: None. I’m already in the limited SSTB group, and my income isn’t high enough to reach the phase out anyway. (Though it is cool for me to be grouped with Athletes and Entertainers for tax purposes, amiright?)
My Opinion: This one would sting some of our clients that are high profit businesses, who are not currently limited by the SSTB rules. So those clients will need additional tax planning to try and stay at or below the income thresholds through careful business investment/timing and income deferral.
Tax Capital Gains as Ordinary Income for Taxpayers Earning $1M+; Also tax Unrealized Gains at Death
- Under current law, long term capital gains are taxed at a max rate of 20% (plus a 3.8% net investment tax surcharge)
- Proposal is for taxpayers earning more than $1M, to be taxed on long term capital gains at ordinary tax rates, which can be as high as 39.6%
- Proposal would also eliminate stepped-up basis at death for capital gains. So dying with highly appreciated assets would become expensive for your estate and/or your heirs.
Impact to Robert: None. Darnit.
My Opinion: This one would impact a select few of our high net worth clients, as well as possibly surprise some of our clients that have large one-time gains (think sale of a business, sale of a commercial property, major stock option exercises). Annual tax planning, and large transaction advisory services, becomes worth its weight in gold, to ensure the best possible tax outcome, if rules such as these take effect. (I know a guy that can help!)
Cap Itemized Deductions (28% limit and Pease limitation)
- Proposes a maximum itemized deduction amount, and a phase-out scale based on income and tax rate
- Also proposes to re-instate the “Pease Limitation” which is currently suspended but scheduled to come back in 2026. Proposal is to restart this limitation now, which reduces itemized deductions for earners over $400K on a phase-out schedule
Impact to Robert: None. My mortgage interest is so low now that itemized deductions barely even come in to play on the tax return.
My Opinion: These limitations existed just a couple of years ago, so wouldn’t be a shock to most people, but with the SALT limitation in place now, and no Misc Itemized Deductions anymore on the Federal return, high earners with large homes, or multiple homes, will really start to feel squeezed here. The mitigating factor is many people are refinancing to lower mortgage rates anyway, so it’s better to spend less on interest in the first place, than to try and deduct it on your tax return.
Increase the Social Security Earnings Cap
- Currently, we all pay 6.2% social security tax on wages up to $137,700 (for 2020). Your employer kicks in another 6.2% to make the total tax 12.4%.
- Proposal is for the social security tax to kick back in when your wages exceed $400K, with no ceiling
Impact to Robert: None. Though it is a relief to see the SS Program get some much-needed funding, maybe it will be around long enough for me to actually benefit from it someday.
My Opinion: This one can get really expensive for super-high earners, with no cap on wages subject to SS tax. And employers take a tax hit here too. You’d likely see more creative deferred compensation arrangements to work around the tax. High profit business owners pay both halves of SS tax, so this one will require additional tax planning effort for them as well. (I know a guy that can help!)
Establish First Time Homebuyer and Renter Credits
- Proposal is to offer a permanent $15,000 first time homebuyer credit (not repayable like the 2008 loan version of this credit from a while ago)
- Proposes a rent credit to limit low-income taxpayer’s rent to no more than 30% of monthly income. Annual credit cap of $5B.
Impact to Robert: None, at least not until my daughters are ready to move out.
My Opinion: The renter credit sounds ripe for fraud, and having some annual nationwide cap sounds like it creates a “race to file first” to claim the credit, which would likely result in filing errors. Need to understand this one better. First Time Homebuyer credit can help young families and recent grads move out earlier, boosts housing market, banks/lenders and real estate investors will find creative ways to capture a lot of that money for themselves.
Increase the Child and Dependent Care Tax Credit
- Current child care credit is based on first $3,000 spent (or $6,000 if you have 2 or more children) and most taxpayers get a 20% credit, so is worth $600 or $1200.
- Proposal is to increase expense limit to $8,000 (or $16,000 if you have 2 or more children), and increase the credit to 35% for most people, so the new credit would be worth something like $2,800 or $5,600.
Impact to Robert: Score! With 2 young children and very high daycare/preschool/camp costs, this one has a direct impact on me. Worth up to $4K in tax savings once our youngest heads off to preschool.
My Opinion: The daycare credit has always been a pet peeve of mine, it’s been such a wimpy $ amount when the true costs are so high. So it is a welcome proposal in my opinion, and long overdue. Childcare costs are a huge part of family budgets these days, this credit will help.
Well, this one was meant to be a brief summary, but like usual, I just kept typing. All of these are just proposals, so who knows what would actually take effect. In general, though, you get an idea as to who would be impacted under a Biden administration. As a tax planner, I pretty much will have workable solutions to all of these. So feel free to vote with your heart, and not with your wallet, and I’ve got your back to limit the impact of any future tax law changes.