Highlights of Some of the Proposals

As President-elect Joe Biden prepares to take office, let’s take a look at some of the proposed tax law changes he has suggested and how, if they were to pass, they might affect your financial decisions.  It’s important to remember that from proposing changes to passing ideas through Congress and signing them into law, there are many steps in the process, and these may or may not come to fruition. 

Joe Biden has stated that he would not increase income taxes for families with incomes below $400,000 and many of his proposals look to raise taxes on individuals with incomes in excess of $400,000.  As future tax laws are passed, we will share specifics with you at that time.  Here is a summary of some of the highlights of Biden’s Tax Plan: 

Maximum Income Tax Bracket

  • Biden’s plan is to increase this back to 39.6% for incomes over $400,000.
  • Currently the top bracket is 37%, reverting to 39.6% after 2025.

Itemized Deduction

  • Biden’s plan would limit itemized deductions for those with incomes in excess of $400,000 and would cap deductions at 28% instead of one’s highest marginal tax bracket.

Changes to Capital Gains

  • Biden’s proposal would be to eliminate the capital gains rates on taxpayers who earn more than $1 million.  This would increase the 20% federal capital gains rate to 39.6%, essentially doubling the rate.
  • Currently the tax rate in 2020 for long-term capital gains is 0% if your taxable income is below $40,000 if you file Single or Married-Filing-Separately, $80,000 if you file jointly and $53,600 for Head of Household.  The rate increases to 15% for taxable incomes above that amount until they reach the top capital gains bracket of 20% if taxable income exceeds $441,450 for Single filers, $248,300 for Married-Filing-Separately, $496,600 for Joint Filers and $469,050 for Head of Household.

Corporate Income Taxes

  • Biden’s plan would increase the rate to 28%.
  • Current rate of 21%.

Payroll Tax Changes

  • Biden’s proposal is to add an additional payroll tax on earned income over $400,000 with no cap.  This would effectively leave a “donut hole” where Social Security Payroll Taxes would be due on the first $142,800 of income (in 2021) and then on incomes in excess of $400,000 but not on the $257,200 (the amount between $142,800 and $400,000).
  • Currently, Social Security Payroll Taxes (FICA) of 12.4% are due annually on up to a maximum compensation level of $137,700 in 2020 ($142,800 in 2021).  This is paid 6.2% by the employer and 6.2% by the employee.  The salary cap increases annually with inflation.
  • Small Business Planning – Biden’s plan is a significant increase especially for small business owners with employees whose income exceeds $400,000.  Also noteworthy is that self-employed individuals pay both the employer and the employee’s portion of FICA (under current and proposal law).

Estate Planning Change in Basis Calculation for Inherited Assets

  • Biden’s proposal would repeal the Step-Up in Basis which would mean that appreciated property would be subject to capital gains or ordinary income taxes when sold as the basis would be a carry-over basis of the deceased’s original cost basis (purchase price).
  • Currently, there is a “step-up” in basis which means that when one inherits assets, the cost basis is increased to the date-of-death value, so that if there was a sale, there would be no or little appreciation or capital gains tax paid if sold shortly after receiving the asset.

Estate Planning Change in Federal Exclusion Amount

  • Biden’s proposal is to return the federal exclusion amount to $5 million.
  • Currently, the federal estate tax exclusion amount is $11,580,000, indexing annually and returning to $5 million (indexed from 2011) in 2026.

Child and Dependent Tax Credit

  • Biden’s proposal would increase the maximum credit to $8,000 ($16,000 for more than one dependent), increase the reimbursement percentage from 35% to 50%, and make it refundable for those with no tax liability.
  • Currently the amount is $3,000 per child under the age of 13 or disabled ($6,000 for more than one dependent).

Child Tax Credit (CTC)

  • Biden plan is to increase the CTC to $3,000 per child for children ages 6-17 and $3,600 for children under 6.
  • Currently the amount is $2,000 per child for children 16 or younger.

Retirement Tax Benefits

  • Biden’s plan substitutes a tax credit for the current deduction allowed for retirement plan savings.
  • Current law allows for a deduction of the amount saved.

First-time homebuyer credit

  • Biden’s proposal is to provide a credit of up to $15,000 for first-time home buyers which would be advanceable and refundable to provide the funds immediately instead of waiting to file a tax return.

As none of the proposed changes are guaranteed to become new tax laws, we recommend working with your financial adviser and/or tax preparer to review the available information and determine what may be best for you and if any year-end income tax or estate tax saving strategies may be appropriate.