Ambitious agenda could face challenges despite unified government
President Joe Biden’s tax plan gained new life on Jan. 5, when Democrats swept the two Senate runoffs in Georgia. The victories positioned the Democratic Party to control the White House and Congress beginning Jan. 20, albeit by narrow majorities in both chambers.
With unified Democratic control, the Biden administration can pursue its agenda and ambitious spending plan on a clearer path than it would have if Republicans had maintained a Senate majority. That increases the likelihood of tax changes, although the extent, nature and timing of them remain uncertain due to continuing public health and economic crises as well as moderates’ influence in a Senate that is split 50-50. (Vice President Kamala Harris is positioned to cast a tie-breaking vote.)
Despite lingering uncertainty at the onset of Biden’s term, his tax plan warrants in-depth consideration now that his party is positioned to control the legislative agenda and support it with Congressional majorities. Here is a breakdown of what we know about Biden’s tax plan from what his campaign and administration have expressed.
Broad overview of the Biden tax plan
Corporate income tax rate
Alternative minimum tax (AMT)
Increase to 28%
TCJA repealed alternative minimum tax
15% minimum tax on global book income of $100 million or more
Section 199A deduction
20% pass-through deduction for qualified business income (QBI)
Phase out the section 199A deduction for those making more than $400,000
Individuals and owners of pass-through entities
37% individual top rate
Reinstitute the top individual income tax rate to 39.6%
Capital gains rate of up to 20%
Tax capital gains as ordinary income for taxpayers with over $1 million in income
Social Security tax for employer and employee applied to first $137,700 of wages or self-employment income
Imposes additional social security taxes on wages or self-employment income over $400,000
Deduction limited through 2025 to medical and dental, limited state taxes, limited real estate taxes, limited home mortgage interest, mortgage insurance premiums, gifts to charity and casualty or theft losses
Reduce the benefit of itemized deductions to a tax benefit of no more than 28%
Estate tax exemption for the first $11.58 million per individual and decedents have a FMV basis in the assets
The Biden proposal could expand the estate and gift tax by reducing the exemption amount to $3.5 million and increasing the top rate for the estate tax to 45%. Biden would consider eliminating step-up in basis for inherited property.
Exchange of real property held for productive use in a trade or business or for investment for real property of like kind to be held for productive use in a trade or business or for investment without recognition of gain or loss
Retain the current like-kind exchange rules for taxpayers earning less than $400,000. Taxpayers with income greater than $400,000 will be ineligible for capital gains deferral
Global intangible low-taxed income (GILTI)
10.5% tax on un-repatriated amounts
Increase rate to 21% applied on a country basis
Increase corporate tax rates
Biden proposes to increase the corporate income tax rate from 21%, as enacted through the passage of the Tax Cuts and Jobs Act (TCJA), to 28%. He stated in a September TV interview: “I’d make the changes on the corporate taxes on day one.” However, his transition team has since downplayed that as a priority.
Biden’s proposal also includes a 15% minimum tax on corporations with global book income of $100 million or more. In essence, this would reinstate AMT repealed with the passage of TCJA for those qualifying businesses. Under the proposal, corporations may claim deductions for net operating loss carryforwards and foreign taxes paid. When determining corporate tax liability, corporations would pay the greater of their regular corporate income tax liability or the 15% minimum tax.
Section 199A deduction
TCJA introduced the section 199A deduction, which is a below-the-line deduction available to owners of sole proprietorships, partnerships, S corporations, and some trusts and estates engaged in qualified trades or businesses. Under the current guidance, the deduction is limited to the lesser of 20% of qualified business income plus 20% of the combined real estate investment trust dividends and qualified publicly traded partnership income, or 20% of the taxpayer’s taxable income minus net capital gains.
While the section 199A deduction is set to expire at the end of 2025, the Biden proposal would maintain the current deduction for those making under $400,000 per year and phase out the deduction completely for those making $400,000 or more. That is on top of Biden’s proposed tax plan to restore the top marginal tax rate for non-corporate taxpayers to the pre-TCJA rate of 39.6%.
Tax proposals affecting individuals’ returns for flow-through entity consideration
Under Biden’s proposal, the top individual income tax rate of 39.6% would be restored. The current top individual income tax rate is 37%. The Biden proposal would also tax capital gains as ordinary income for taxpayers with over $1 million in income.
The Biden proposal increases social security taxes by imposing social security taxes on earnings over $400,000. Currently, social security taxes of 12.4% are imposed on wages or self-employment income up to $137,700 for 2020 (this is indexed for inflation). The proposal would create a donut where the social security tax would stop on income over the normal threshold (i.e., $137,700 for 2020) and then apply to amounts above $400,000. This increased tax would apply only to the employee at a rate of 12.4%.
The Biden proposal would reintroduce the Pease limitation on income that exceeds $400,000. That limitation reduces itemized deductions by 3% for every dollar that income exceeds $400,000. In addition, the plan could cap the benefit of itemized deductions to a tax benefit of no more than 28%. So if a taxpayer was in the 39.6% bracket, a dollar deducted would reduce taxes owed only by 28% instead of 39.6%. In 2019, Biden indicated that he would eliminate the $10,000 cap on the deduction for state and local tax. This item has not been officially included in his proposals.
Biden’s proposal could affect the tax-free transfer of property on death in two ways. Under current law, the first $11.58 million of an estate is not taxed, and estate beneficiaries or heirs receive the property with a basis equal to the fair market value of the property. That means an estate’s beneficiary could immediately sell the property with appreciation never being taxed. Biden’s proposal could reduce the estate tax exemption to $3.5 million, the exemption that was in effect in 2009. He has further suggested that he would consider eliminating the so-called “step-up in basis” or tax unrealized gains. These potential changes could lead to a substantial increase in taxes on estate beneficiaries, complicating business transfers on death.
Under section 1031, taxpayers may exchange real property held for productive use in a trade or business or for investment for real property of like kind to be held for productive use in a trade or business or for investment without recognition of gain or loss. The TCJA amended section 1031 to exclude exchanges of personal or intangible property from like-kind treatment. Biden’s proposal allows for taxpayers with income under $400,000 to make a tax-free exchange of real property held for productive use in a trade or business or for investment for property of like kind. However, taxpayers with income greater than $400,000 must recognize in taxable income the capital gains from the sales of real property.
Global intangible low-taxed income (GILTI)
Companies headquartered in the United States currently pay a 10.5% minimum tax on the unrepatriated low-tax profits earned by their foreign subsidiaries from intangible assets such as patents, trademarks, and copyrights. The TCJA introduced the GILTI tax in an attempt to discourage corporations from shifting intangible assets and related profits to low-tax jurisdictions. Biden’s proposal doubles the GILTI tax rate to 21% and applies it on a country-by-country basis.
Additional Biden proposals
Much of Biden’s proposal focuses on moving the United States towards more reliance on renewable energy and away from fossil fuels, as well as encouraging investment in the United States. In order to achieve these objectives, Biden released limited details regarding the establishment or expansion of certain tax incentives including, but not limited to, the Manufacturing Communities Tax Credit, New Markets Tax Credit and Solar Investment Tax Credit.
The Manufacturing Communities Tax Credit, originally proposed during the Obama administration, targets communities that have suffered economic disruption due to manufacturing plant closures or government office closures that provided the community with significant employment opportunities.
The New Markets Tax Credit currently provides investors with a federal tax credit in exchange for investment in low-income communities.
The Solar Investment Tax Credit rewards businesses that invest in solar facility construction. Congress extended the credit in 2015; however, the deduction in 2019 was 30% and will be further reduced in 2020, 2021 and 2022, without additional action.
In addition to the like-kind exchange limitations, Biden has also proposed to eliminate certain tax incentives for the real estate industry, including eliminating the passive loss rules for $25,000 of rental losses and accelerated depreciation on rental housing.
President Biden’s campaign promoted a $5.4 trillion spending plan over the next decade and a framework to generate $3.4 trillion in new tax revenue, according to an analysis by the University of Pennsylvania’s Wharton School of Business Budget Model. It remains to be seen how successful the Biden administration will be in pursuing its agenda, but having the support of a Democratic-controlled Congress will certainly help.
While numerous uncertainties shape the environment at the dawn of this new era in American policy, taxpayers should familiarize themselves with Biden’s plan, remain vigilant for developments and position themselves to act at the appropriate times.
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