Assuming that current predictions are accurate, on January 20, 2021, we will see the 46th President of the United States inaugurated.
During his campaign, Joe Biden promised tax increases – only on the wealthiest individuals and corporations – over the next decade of some ~$3.5 trillion.
On the campaign trail, Biden’s platform on individual tax changes included:
- Restoring the top rate on ordinary income for individuals to 39.6%. The Tax Cuts and Jobs Act of 2017 (TCJA) reduced this top rate to 37%.
- Taxing long-term capital gains and dividends at ordinary income rates for filers with taxable income over $1 million. Under current law, long-term capital gains and qualified dividends are taxed at a top rate 20%, with an additional 3.8% net investment tax applicable to single filers with income over $200,000 and joint filers with income over $250,000.
- Passthrough income is currently taxed at the owner’s individual rate with a 20% deduction (under section 199A, set to expire after December 31, 2025) for business profit earned domestically. Biden proposes to phase out the 199A deduction for filers with income of over $400,000.
- The TCJA repealed the “Pease limitation,” whereby many itemized deductions were subject to a reduction for those with income above a certain threshold for their filing status. Biden plans to restore the “Pease limitation” for those earning over $400,000, capping the credit for itemized deductions at 28%, rather than the percentage at which the taxpayer’s adjusted gross income is taxed.
- For 2021, the Social Security tax under current law would be 12.4% on an individual’s first $142,800 of earnings; the tax is split equally between employers and employees. Biden would like to expand the Social Security tax to apply to incomes over $400,000. This would create a “doughnut hole” in the form of untaxed earnings falling between $142,800 and $400,000. This is perhaps one of the most overlooked tax increases – it could represent an enormous tax hike on high income earners, especially businesses owners.
- Under the current tax code, estates are taxed at 40%, with an estate exclusion amount of $11.58 million per individual for 2020. Biden has called for returning the estate tax treatment 2009 levels, which would indicate a 45% top rate on estates and the estate exclusion amount dropping to $3.5 million per person.
- Inherited assets, for purpose of capital gains taxation, are valued at the time of death, or the alternative valuation date, with a step-up in basis. Biden would repeal this provision, with heirs potentially paying capital gains tax based upon the valuation of the assets at their initial purchase date by the decedent.
It is unclear, at this point, whether a President Biden would in fact push for all of these changes in 2021. Some of the proposals, including the change to Social Security taxes, would face procedural challenges as well as potential Congressional opposition.
It is also uncertain whether any proposed tax increase would pass, given that control of the Senate will remain a mystery until after Georgia’s two runoff elections on January 5, 2021. Both of Georgia’s Senate incumbents are Republican; if even one wins, the Senate remains under Republican control, and they are unlikely to look favorably on tax hikes. If both seats flip to the Democrats, however, then the parties are effectively tied, with the Senate President (presumably a Vice President Kamala Harris) able to cast a tie-breaking vote.
Stay tuned – next week we will address the tax changes Biden is proposing for businesses.
If you would like to discuss how possible tax increases in 2021 could potentially impact your own income tax liabilities, please click here to email me directly.
Until next Wednesday –