How will the Biden Administration’s Proposed Tax Plan affect me?
Merrell and Krystal discuss the proposed tax plan under the Biden administration and the importance of getting the information out to clients.
Most proposed changes affect those individuals with taxable income rates over $400,000. There are also substantial changes for investors and corporations, and changes to the gift and estate tax codes. Among other tax credit changes, Biden’s first time homebuyers’ credit would provide up to $15,000.
:45 – We know our clients want to know if their estate plans will need revision
1:10 – The proposed changes affect individual income tax rates, corporate income tax rates, federal estate taxes and lifetime gifting limits. Most changes affect those with taxable income over $400,000
1:49 – The donut hole in the Social Security payroll tax
2:55 – Top taxable income rate changes from 37% to 39.6% (applies to income over $400,000)
3:35 – What about itemized deductions?
4:06 – Long term capital gains changes are a BIG change to investors
4:33 – Qualified business income deductions (Section 199A) will be phased out
4:47 – Real estate opportunity zones and capital gains exemptions
5:43 – Tax benefits for renewable energy and expiring solar energy credit
6:38 – Corporate income tax rate increases from 21% to 28%
6:55 – Estate tax and gift tax changes. One proposal involves restoring them to the 2009 level
8:54 – Additionally, the step-up in basis could be eliminated. This is problematic for a number of reasons
10:21 – Implications of losing step-up in basis when it comes to inheriting property
13:27 – Because Congress will make the rules, we probably don’t want to make changes until we see what happens
14:10 – Merrell pleads with Biden to 1) not to make anything retroactive 2) or make the gift tax exemption and the estate tax exemption bifurcated and 3) take away the step-up in basis
15:00 – Krystal discusses strategic gifting for clients with a large combined net worth before the end of the year
16:56 – Additional changes include expanding the Earned Income Tax Credit, Child Dependent Care Tax Credit, and re-establishing the First Time Homebuyers’ Tax Credit.
17:35 – Brief discussion of the current housing market
Tax Bosses’ detailed notes:
Most of the proposed income tax changes affect those individuals with taxable income over $400,000 and include:
Imposing a 12.4 percent Social Security payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
Reverting the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
Capping the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
Imposing a limitation on itemized deductions for taxable incomes above $400,000.
Phasing out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million
Proposed corporate income tax changes include:
Increasing the corporate income tax rate from 21 percent to 28 percent.
Creating a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
Expands the New Markets Tax Credit and makes it permanent. The NMTC Program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years.
Offers tax credits to small business for adopting workplace retirement savings plans.
Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.
Proposed federal estate and gift tax changes include:
Restoring the federal estate and gift tax rates and exemption to the 2009 level. In 2009, the federal estate tax exemption amount was $3.5 million and the lifetime gift exemption was $1 million. The maximum tax rate was 45%. There is also talk that the exemption amount might be in the $3.5 – $6 million range, but even on the highest end, that is ½ of what we currently have. And the lifetime gifting may no longer be tied to the federal estate tax exemption.
Eliminating step-up in basis at death for capital gains taxation.
Some additional proposals that may be of interest to advisors and our clients include:
Expanding the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
Expanding the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
Reestablishing the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
Details and Analysis from the Tax Foundation
Summary of Changes from the Wall Street Journal