During his presidential campaign, Joe Biden outlined his tax policy proposals1, which included rolling back key provisions from the Tax Cuts and Jobs Act (TCJA). An analysis by the Tax Foundation estimated the Biden plan would raise tax revenue by $3.3 trillion over the next decade.
|Biden Tax Plan
Federal Income Tax Rate
|Restore the top rate to the pre-TCJA level of 39.6% for taxable incomes above $400,000
|Social Security Payroll Tax
|Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) tax (6.2%) is not collected on earnings above $137,700 (2020 earnings limit)
|Collect additional OASDI tax on earnings above $400,000; this would effectively create a “donut hole” for the OASDI tax
|Long-Term Capital Gains & Qualified Dividends
|Top federal tax rate of 20%, plus 3.8% Net Investment Income Tax (NIIT)
|Tax at the top (proposed) ordinary income rate of 39.6% for taxpayers with incomes above $1 million
|Itemized deductions generally provide a tax benefit equivalent to a taxpayer’s income tax bracket
|Limit the tax benefit of itemized deductions to 28% for taxpayers earning more than $400,000
Restore the Pease limitation on itemized deductions for taxpayers earning more than $400,000
|Estate & Gift Tax Exemption
|$11.58 million per person for 2020 with a top rate of 40%
$11.70 million per person for 2021 (subject to change)
|Return estate tax to 2009 levels: reduce the estate exemption to $3.5 million per person, with a top federal estate tax rate of 45%; Gift tax exemption at $1M
|Cost Basis at Death
|Heirs receive property with a step-up in cost basis equal to fair market value
|Eliminate the step-up in cost basis, though possibly with a base exemption
|Corporate Income Tax Rate
|Raise to 28%
|Section 199A Deduction
|The Tax Cuts & Jobs Act created a 20% deduction for pass-through business income for certain eligible taxpayers
|No explicit details, but presumed that taxpayers earning more than $400,000 may see the deduction phased out
Now that Georgia has elected two Democratic senators to Congress, where does this leave taxpayers? No one knows for sure. We would offer the following insights:
- Moderates Matter – It is not guaranteed that all Democratic senators would fall in line with broader party proposals. This may particularly be the case for moderate Democrats as well as Democratic senators who hail from states that otherwise lean Republican.
- Proposals May Only be a Starting Point – Certain elements of the proposed Biden tax plan could be modified or even scrapped altogether. For example, there is already speculation that eliminating the step-up in cost basis (which could meaningfully impact inherited family businesses or family farms) could fail to gain broad support.
- Time Still on the Clock? – The current general consensus is that taxpayers may still have additional time to plan in 2021 due to a perceived reluctance by Congress to implement tax increases on a retroactive basis.
- Mark Luscombe, a CPA, attorney and principal analyst for Wolters Kluwer Tax & Accounting commented that newly elected presidents “have a pretty good record of getting things through during their first year in office… assuming [tax reform is] passed in 2021, any legislation probably won’t be effective until 2022. Congress seems to be hesitant to make tax hikes retroactive.”
- An analysis by Grant Thornton2 noted “retroactive tax rate increases are relatively rare, but not unprecedented. There have been six major rate increases since 1980 and … only the 1993 increases in the corporate and individual rates were retroactive” [passed August 1993, but effective as of January 1, 1993].
- However, any planning by a taxpayer in 2021 will need to factor in the possibility of a tax bill made effective retroactively as of January 1, 2021.
- Legislative Priorities & Economic Health – Given the ongoing COVID-19 pandemic, additional coronavirus-related stimulus and relief packages may take priority over tax reform legislation, which might further delay the implementation of any tax changes. Senator Richard Blumenthal (D-Connecticut) said Democrats will need to balance raising tax revenue with the health of the U.S. economy, noting, “I think a tax bill can be made effective at a time when we think the economy will be sufficiently robust that some increase in taxes will have no detrimental effect.”
If you have questions or concerns about how you may be affected under these tax proposals, please contact us so we can help you navigate next steps.
1 The Tax Foundation – “Details and Analysis of President-elect Joe Biden’s Tax Plan” (October 22, 2020)
2 Grant Thornton – “Biden Win Changes Tax Policy and Planning Outlook” (November 9, 2020)