As we head into the final week of the 2020 Presidential campaign it is important to examine how a Joe Biden victory could potentially impact your taxes in 2021 and beyond. Biden’s proposed strategy is to focus on the highest earners and particularly those that make over $400,000. The country’s finances are in dire straits and whichever party wins will need to implement changes quickly to raise revenue. At this time, President Trump has not released any new plans to adjust the tax code. As expected, neither candidate spoke at length about taxes during the debates since no one wins by discussing tax increases!
It is very important to remember who controls the Senate will have a large bearing on whether Biden or Trump can fully implement their plans. Below is a preliminary look at Biden’s proposals.
Top Marginal Tax Rate – return to the top marginal rate of 39.6% on ordinary income above $400,000. Currently, the top marginal rate is 37% on taxable income above $622,050 for joint filers and $518,400 for single filers.
- Capital Gains and Dividends Taxes – any profits above $1 million regardless of total income would pay 39.6%. As it stands now, joint filers with income below $80,000 pay no capital gains tax. Those with income between $80,000 and $496,600 pay 15%. The tax is 20% on income above $496,000.
- Social Security Tax on Income above $400,000 – calls for 12.4% tax split 50/50 between employee and employer. Currently, Social Security taxes are only on the first $137,700 of wage income. Self-employed people would pay the full 12.4% over $400,000.
- Cap on Itemized Deductions – Biden proposes a cap on amount of deductions (charity, mortgage interest, etc.) for those making over $400,000 to 28%.
- Phase-out the Qualified Business Income Tax Deduction – perhaps one of the most complicated aspects of Trump 2018 tax cuts, the QBI deduction allows owners of pass-through entities (self-employed, LLCs, S Corporations) to potentially deduct 20% of qualified income if several factors are met including what type of business. Biden would eliminate the deduction for those making over $400,000.
- Estate Tax Exemption Reduction – the current law increased the per person exemption to $11.58 million per person for 2020. Biden’s plan would reduce the per person exemption back to the 2017 level of $5.49 million per person.
- Loss of Step-up in Cost Basis – perhaps the most controversial of Biden’s proposal, this would eliminate the step-up in cost basis for inherited assets. Under current laws, appreciation on investments, businesses, real estate, etc. gets a step-up in basis when the owner dies so the heirs inherit the asset at current market value and would owe zero capital gains tax if sold immediately.
- Reinstate Home Buyers Credit – similar to law passed in 2008, this would provide a tax credit of up to $15,000 for first-time home buyers.
- Expand Child and Dependent Care Credit – minimal details provided so far but this would increase the tax credit for joint filers who both work to cover childcare and school expenses.
- Corporate Tax Increase – increase rate from 21% to 28% and enact a 15% minimum “book tax” on corporations with income above $100 million. Both Biden and Trump want to make sure companies are avoiding paying taxes in the United States
It is always interesting (or perhaps scary) to hear proposals. It is important to note that plans evolve and the pandemic has greatly altered the norm. Tax policy is not entirely up to the president so all components will be negotiated whether one party holds the majority or not. Regardless of the outcome, I highly recommend speaking to your tax advisor if you have concerns!