No matter the results of an election year, they always bring about shifts to both social and economic policies as candidates make promises of change on the campaign trail. This year was no different, and although recounts and lawsuits are prohibiting a concrete finish, as of now, the apparent leader in vote count is Joe Biden. With that in mind, it may be time to consider the potential changes coming to tax policies with a Biden presidency so that you and your business can prepare as needed. This post will discuss what specific tax policy proposals President-elect Joe Biden made on the campaign trail and what is still to be determined with the new president coming into office.
What is known: President-elect Joe Biden’s Tax Proposals
On the campaign trail, Joe Biden made the following proposed changes to tax policies:
- Restore the top 39.6% individual income tax rate for taxable income over $400,000. The current top individual income tax rate is 37%.
- Raise the corporate tax rate from 21% to 28%.
- Eliminate the current income tax reduction that comes with funding a 401(k) account and replace it with a tax credit.
- Institute a new level of FICA payroll tax on earned income above $400,000. The current 12.4% FICA payroll tax will remain split 6.2% between employees and employers for the first $137,700 of an individual’s earned income.
- Phase-out of the 20% deduction for qualified business income for income above $400,000.
- Lower the federal estate tax exemption from $11.58MM back to pre-2018 tax reform levels, which would be around $5MM.
- End favorable capital gains rates and qualifying dividends for anyone making over $1MM. These types of income would be taxed at the top individual income tax bracket of 39.6%. Most capital gains above $1MM would also be subject to the 3.8% Medicare surtax, so the actual rate could be as high as 43.4%.
- Enhancements to certain tax credits including an increase to the child tax credit, re-introducing the first-time home buyer credit and energy efficient credit, and a newly proposed caregiver tax credit.
- Eliminate the step-up in basis for inherited capital assets. For more details on this proposal, check out this article
- Restore the Pease limitation on itemized deduction for individuals making more than $400,000. The Pease limitation reduces the amount of itemized deductions allowed.
What is unknown: The Implementation of Biden’s Proposals
Although we do know that President-elect Joe Biden made the above proposals on the campaign trail, the impacts of these proposals are still to be determined because it relies on cooperation from the House and Senate to pass such tax legislation into fruition. Due to the election results, we know that Democrats held onto the House majority but lost several seats. For the Senate, Republicans are projected to hold a 50-48 margin with two Georgia Senate runoff elections to be held on January 5th. The outcome of those runoff elections will determine if there will be a divided government, or a Democratic controlled one. If Republicans hold onto the Senate, it is unlikely Biden’s proposals would pass. His agenda items would expectedly be delayed until after the 2022 midterms.
As of now, the above list of proposals remains to be a campaign agenda, but that doesn’t mean it’s not crucial to be aware of potential tax planning changes. That way, no matter what happens, you and your business can be ready for whatever lies ahead.
As news on tax reforms continue to develop, we will provide you updates on the latest information. In the meantime, if you need assistance, reach out to your trusted advisor at BerganKDV or start here.