Biden has officially been sworn in as the 46th President of the United States with plans to address the Covid-19 Pandemic and implement immigration reform, among other things, within his first few days in office. Another priority item is the promise to overhaul the U.S. Tax Code, which was a large part of President Biden’s campaign. The Biden Plan not only proposes to repeal many of the changes made by former President Trump’s 2017 Tax Cut and Jobs Act (TCJA), but also proposes changes to longstanding provisions in our Tax Code, such as the Section 1031 like-kind exchange provision which was enacted by Congress exactly 100 years ago in 1921. Although there is no tax bill pending before Congress at this time, it is important to understand what the Biden Administration has proposed, what other democrats in key positions have proposed, and how those proposals may affect you if, or when, they come into effect.
Prior to his election, President Biden released his tax plan, “A Tale of Two Tax Policies: Trump Rewards Wealth, Biden Rewards Work.” Some key points from the Biden Plan include:
- raising the corporate tax rate from the current 21% to 28%;
- imposing an annual 15% minimum tax on corporate book income for corporations having net income of more than $100 million;
- raising the ordinary income rate in the top Federal tax bracket from the current 37% to 39.6% (for income that is subject to the additional 3.8% Medicare tax, the top rate would be 43.4%), and lowering the bracket at which an individual is subject to the top tax rate to only $400,000; and
- taxing capital gains and qualified dividends for individuals with income of over $1 million at ordinary income tax rates rather than the current 20% capital gains tax rate.
President Biden also ran on other tax policies that, although not laid out in his official tax plan, have a possibility of making it into his tax Bill. A few important examples include:
- repealing Section 1031 like-kind exchanges;
- capping itemized deductions at 28% of adjusted gross income for taxpayers with income above $400,000 and restoring the “Pease” limitation on itemized deductions, which reduces the value of certain itemized deductions by 3% for every dollar of a taxpayer’s income above $400,000 (with a maximum reduction equal to 80% of a taxpayer’s total itemized deductions);
- phasing out the “qualified business income” Section 199A deduction for taxpayers with income above $400,000, which effectively increases the top tax rate for a number of small businesses from 29.6% to 39.6%;
- repealing the step-up in basis on property received from a decedent and treating the decedent’s property as if it were sold on the date of death so that there would be income tax on the unrealized appreciation in such property. The unrealized appreciation in a decedent’s property would be taxed at long-term capital gains rates (which gains would be taxed at ordinary income rates for taxpayers with income over $1 million);
- reducing the estate and gift tax exemptions from their current $11.7 million to $3.5 million for the estate tax exemption and $1 million for the gift tax exemption, and raising the estate and gift tax rate from 40% to 45%;
- applying the 12.4% social security payroll tax to all wages over $400,000, in addition to the current payroll tax on income up to $142,800; and
- imposing a 10% penalty on offshore manufacturing and service jobs and providing a 10% “Made in America” tax credit.
In addition to the Biden Plan, Senator Ron Wyden (D-OR), the new chairman of the Senate Finance Committee, has also proposed some dramatic changes to our current tax system. While some of his proposals overlap with the Biden Plan, a major deviation is a theory of taxing certain individuals, estates, and trusts on a “mark-to-market” basis. In our current tax system, an individual is only taxed on income that is realized, for example, when stock or property is sold. Taxing on a “mark-to-market” basis means an individual would be taxed on certain unrealized gains at the end of each year.
The Biden Plan also proposes a number of benefits to certain taxpayers, some of which include:
- repealing the TCJA $10,000 cap on state and local taxes, which includes property taxes. This would allow taxpayers who itemize deductions to deduct the full amount they pay in either state income taxes or sales taxes, as well as the full amount they pay in property taxes;
- increasing the Child Tax Credit by $3,000 per child ages 6 to 17 and $3,600 for children under 6 for 2021;
- creating a First-Time Home Buyer Tax Credit of up to $15,000; and
- creating additional tax credits to help subsidize healthcare, child care, and care for aging loved ones.
While we will not know exactly when and how the Biden Administration will propose its promised changes to the Tax Code, it is important to understand these concepts to be ready if and when they affect you or your business.