With the elections finally well and done, it is now prudent to consider the possibility of significant tax reform occurring during President Biden’s administration. President Biden’s general position on tax reform is that corporations and high-income individuals need to pay more taxes to fund various efforts on climate change, healthcare, education, wealth inequality, etc. As tax professionals we can offer educated guesses based on legislative history and campaign trail proposals.
Please note that many of these changes refer to an income threshold of $400,000 per year, a figure President Biden has referred to repeatedly. It is not clear whether his references to this figure assume an individual or household income of $400,000, but most experts assume the latter.
- The top marginal tax rate (the maximum rate at the highest tax bracket) will increase from 37% to 39.6%, which was the top marginal rate prior to the Tax Cuts and Jobs Act (TCJA) put in place under the Trump administration. Note that the reduction of the top marginal rate provided by TCJA was written as a temporary change ending in 2025. So, the top marginal rate will return to 39.6% at that time without further action being taken.
- Households making over $1,000,000 per year would pay taxes on qualified dividends and long-term capital gains at their marginal rate (as high as 39.6%) rather than the modified rates currently levied against this type of income (as high as 20%).
- The estate tax exemption (the value an estate can be before estate taxes are generated) would be lowered from $10,000,000 (not including indexed inflation) to $3,500,000. The tax rate would increase from 40% to 45%.
- Currently the social security portion of payroll taxes is levied only on the first $142,800 of wages. It has been proposed to also levy social security payroll tax on wages over $400,000. This would create a “donut hole” of wages between $142,800 to $400,000 in which social security tax would not be levied, but it would be levied on any amount of wages not in that range.
- Reinstate the Pease limitation that was temporarily suspended by the TCJA. The Pease limitation phases out itemized deductions with a maximum cap of 28%. For example, an individual would only receive a deduction for 28% of their itemized deductions. Biden would alter the Pease limitation to only affect households making more than $400,000 per year. The temporary suspension of the Pease limitation provided by the TCJA will expire in 2025, so it will return at that time without further action.
- The qualified business income deduction would be phased out for all households with income over $400,000 per year. This deduction was introduced by the TCJA and provides a 20% deduction for business income and some real estate investments.
- Elimination of 1031 like-kind exchanges, which are currently used to defer income tax generated on the sale of real estate.
President Biden would use some of the revenue generated by tax increases on corporations and high-income individuals to provide targeted tax relief to lower- and middle-class families. Below are some of the changes that have been suggested:
- The child tax credit would be increased from $2,000 per child to $3,000 per child ages 6 to 17, and $3,600 for children under the age of 6.
- The childcare tax credit would increase from $3,000 for one child and $6,000 for two or more children to $8,000 for one child and $16,000 for two or more children.
- A new caregiver tax credit of $5,000 would be created for individuals caring for elderly or ill family members.
- The first-time homebuyer tax credit would return, this time for an amount up to $15,000.
- A tax credit for low-income renters would be created that would cap housing costs at 30% of income.
- Various energy-saving tax credits would be restored and/or expanded, such as the electric vehicle tax credit
Most tax professionals see Biden tax reform as inevitable. Congress is currently working on another round of COVID-19 relief measures, and perhaps after that they could begin working on a tax reform package. Even if that were to occur, tax reform would likely not be finalized until this summer or later.
Regardless of the exact timing of tax reform, there is the question of whether changes will be retroactive to 01/01/2021 or will begin on 01/01/2022 or 01/01/2023. Unfortunately, no one can answer this question at the moment.
I strongly advise readers to consult with their tax professional regarding Biden tax reform. If you would like to speak to our firm, ADKF, regarding this or any other tax matter, please give us a call. We will be happy to provide an initial consultation at no charge.