Biden Tax Plan and the Importance of Tax Planning

It’s been an interesting few days with the election. I think we are in for a rollercoaster for the next couple of weeks.

A lot of people have been asking me how their taxes will differ under the Biden Administration if he becomes President-Elect. Remember these are just proposals and they would need to pass the house and senate to become law. The following discusses Biden’s proposed tax plan as of October 22, 2020. These changes affect individuals, corporation,s and estate, and gift taxes.

The Tax Cuts and Jobs Act (TCJA) would be immediately repealed. This means the Affordable Care Act provisions would be back in place.

Individuals

· Reverts the top individual income tax rate for taxable incomes above $400,000 (married filing joint and $200,000 single) from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.

· Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.

· Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000 (married filing joint and $200,000 single), which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.

· Restores the Pease limitation (phase out) on itemized deductions for taxable incomes above $400,000.

· Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000 (married filing joint and $200,000 single).

· Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (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.

· Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+

· Provide renewable-energy-related tax credits to individuals.

· Expands 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.

· Reestablishes the First-Time Homebuyers’ Tax Credit, would provide up to $15,000 for first-time homebuyers.

Estate Tax

· Reduces the gift tax exemption to 2009 levels, this would be $13,000 gifts per individual

· Reduces the estate tax lifetime exemption to 2009 levels, this would be $7 million (married filing joint) and $3.5 Million single

· Repeal the present law “step-up in basis” rule that increases the tax basis for inherited assets to their full fair market value upon death. This rule—which ‘carries over’ an asset’s tax basis from the testator to the heir—likely would entail a significantly greater overall tax burden with respect to transferred assets than would the decreased exemption. What does this mean in non accounting speak? If you inherit your families home that was purchased in the 1980s you do not get the value of the property at the date of death of your loved one. You inherit the property at the price it was originally purchased for in the 1980s.

Business Changes

· Increases the corporate income tax rate from 21 percent to 28 percent. It is anticipated that flow throughs (S Corps, Partnerships and Schedule C’s could go up by the same percentage).

· Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure

· Expands the New Markets Tax Credit and makes it permanent.

· 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.

If Biden does become President Elect it is now more important than ever to schedule a tax planning meeting. We take a proactive approach and discuss these items, how they personally affect you, your family and your next year’s tax return. We plan for the worst and then make changes today to put you into the desired tax situation for next year. Once we get into 2021 there is not much we can do as we are in a reactive position in preparing your 2020 tax return.

Also, remember if you received a stimulus payment most likely those were pre-refunds which will be included on your 2020 tax return. So if you usually get a refund, your refund will be less next year. If you usually owe, you may owe more next year and if you are in a neutral position it may push you into a category of owing money.

Now is a critical time for planning. We are available for appointments at your convenience and can do them remotely via Zoom and Go To Meeting or in person.