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Expected Tax Changes Under the Biden Administration

By: David Leipnik

The year ahead could bring major tax changes for businesses and families. President-elect Joe Biden talked about several big tax changes on the campaign trail. What we don’t yet know is how easy it will be for those proposed changes to become law.

The Georgia Runoff and Why it Matters

Let’s first take a step back and talk about Georgia. On January 5, 2021, Georgia voters will vote in a runoff. A runoff happens when no candidate wins the majority of the votes, forcing another vote. Back in November, neither candidate in the state’s two senatorial races won enough votes to clinch either seat.

That has a big impact on tax reform for the rest of the country. When a president has control of both the House and the Senate, the administration has more flexibility than with a divided Congress.

Right now, Republicans hold the lead in the Senate at 50-48. However, the two remaining Senate seats in Georgia will decide who retains control. If the Democrats were to win both seats, Democrats will control the Senate, along with the House and presidency. (In a 50-50 tie of the Senate, Vice President-elect Kamala Harris would cast the deciding vote.)

If Republicans retain control of the Senate by winning just one of the seats, the Biden administration will likely struggle to pass any large proposed tax changes. On the other hand, if Democrats gain control of the Senate by winning both seats, we expect to see many of president-elect Biden’s tax proposals take effect in 2021.

What Tax Changes To Expect Under the Biden Administration

For Businesses

  • The corporate tax rate would increase from the current income tax rate of 21% to 28%. While this is lower than the corporate tax rate under the Obama administration (35%), it would still be a significant rate increase from the current rate.
  • Implementation of a minimum tax of 15% on book income of over $100 million. This would ensure that large corporations, like Amazon, pay tax.
  • Phasing out the tax benefits associated with the Qualified Business Income Deduction for individuals making over $400,000, effectively raising the top business income tax rate from 29.6% to 39.6%.

For Individuals

  • Ordinary income tax rates increase for those with an income of over $400,000. The highest income tax bracket would increase from 37% to 39.6%.
  • Long-term capital gains and qualified dividend rate change for those with an income of over $1 million up to the highest income tax bracket.
  • Repeal of the state and local tax deduction cap rule. Although this is not part of the Biden administration’s proposal, democratic leadership has stated this is a priority.
  • Cap the benefits of itemized deductions at 28% of their value, regardless of tax bracket, for those making over $400,000.
  • Impose a 12.4% social security payroll tax on wages over $400,000. The current cap would remain for wages between $137,700 and $400,000.
  • Raise the child tax credit to $3,600 per child under the age of six and to $3,000 per child between the ages of 6 and 17. The child tax credit would also become a fully refundable credit and allow taxpayers to receive the credit in monthly installments.

For Estates

  • Raise the estate tax rate from 40% to 45%.
  • Lower the exemption from the current $11.58 million to $3.5 million for individuals.
  • Elimination of step-up in basis upon death.

Time to Start Planning

While there are no guarantees that any of the proposed tax changes will come to fruition, especially given the Georgia runoff, now is the time to start planning on what steps your business or family can take to protect your finances.

For high net worth individuals and families, consider using the increased exemption available in 2020 and gift away assets if your estate is more than the current exemption amounts ($11.58 million for each individual in 2020).

Generally, we try to defer income and accelerate deductions for cash-basis taxpayers in any given year. However, you may want to reconsider this strategy with the proposed tax increases in 2021. You should also consider this for income that you may control the timing of, like bonuses or stock options.

If you have highly appreciated capital assets that you are looking to sell soon, you may want to consider recognizing that gain in 2020 when there are still favorable capital gains rates.

Need Help?

If you have questions about tax planning or preparation, contact us online or call 800.899.4623.

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Published December 17, 2020

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