From tax brackets to estate taxes, President-elect Joe Biden has proposed many changes that could affect you.
The transition from a Trump presidency to a Biden presidency could have significant implications on many aspects of our lives – including tax policy, where a repeal of many of the 2017 Tax Cuts and Jobs Act’s provisions might be on the table. Here are some of the Biden tax proposals Congress could weigh in on.
An Increase in Individual Tax Brackets
During the 2020 election, President-elect Biden proposed several changes to individual tax brackets:
- An increase to the top tax rate. Individuals with income over $400,000 could see their tax bracket increase to 39.6%.
- A new Social Security tax. President-elect Biden has also proposed a 12.4% Social Security tax on wages above $400,000, to be evenly split between the employer and employee. This new tax could create a new “doughnut hole,” since wages between $137,700 (the current wage cap for 2020) and $400,000 would not be subject to the tax.
- A new capital gains tax. Biden has also proposed to tax long-term capital gains and qualified dividends at 39.6% for individuals with income over $1 million. Currently, all long-term capital gains and qualified dividends are taxed at a maximum rate of 20%.
Limitations on Individual Tax Deductions
Biden’s tax plan phases out the qualified business income deduction if your taxable income is more than $400,000. It also restores the Pease limitation on itemized deductions, which reduces a taxpayer’s itemized deduction by the lesser of 3% of income over a specified threshold or 80% of total itemized deductions. Additionally, the tax benefit of all itemized deductions would be capped at 28% of their value, regardless of your tax bracket, as opposed to the current deduction at your marginal tax rate.
For example, an individual who itemizes on their return would receive a benefit equal to 32% for each additional dollar claimed as an itemized deduction. Under the proposed changes, the benefit would be limited to 28% of the deduction value.
One benefit for wealthy taxpayers: Biden intends to eliminate the $10,000 cap on state and local tax (SALT) deductions imposed by the TCJA.
An Expansion of Individual Tax Credits
Biden also plans to introduce or expand several tax credits:
- First-time homebuyers may be eligible for a First Down Payment Tax Credit worth up to $15,000, which would help cover the costs associated with purchasing a new home. We saw a similar credit in the Housing and Economic Recovery Act from 2008 that expired in 2010.
- The maximum child and dependent care credit would increase from $2,100 to $8,000. The eligible credit would still be phased out for individuals with higher income.
- The earned income tax credit for childless workers aged 65 and up would be expanded.
- The full electric vehicle tax credit would be reinstated.
- The Affordable Care Act’s premium tax credit would be expanded.
Changes for Real Estate Investors
Biden proposes eliminating the 1031 exchange, commonly known as a “like-kind exchange.” This section of the Internal Revenue Code allows real estate investors to defer recognition of a capital gain on the sale of business property by investing the proceeds into another business property.
Estate Tax Changes
Biden has also proposed reducing the current estate tax exemption from $11.58 million per person to a pre-TCJA $5.49 million, adjusted for inflation, with the estate tax rate unchanged at 40%. Biden’s plan does include the elimination of the step-up in basis at death.
This would also mean a decrease in the lifetime gift exemption, which is the amount you can give to third parties during your lifetime without paying gift tax and is equivalent to the estate tax exemption. Any time an individual makes a gift over the annual exclusion amount, both their lifetime gift and estate tax exclusion are reduced; upon death, any unused gift exclusion can be used as an exclusion on their estate tax return.
It’s important to note that these are only proposals – any changes to the tax code will depend heavily on what a highly partisan and divided Congress chooses to pass – and for initiatives like the Opportunity Zone program, it’s too soon to even speculate what might be in store. Regardless of what the new administration has planned, it’s worth remembering that tax planning should be an annual, dynamic process. No matter what comes out of Washington, our team can work with your tax planner and other consultants to make sure you're prepared.