By Laurie Smith
With the presidential election in our rearview window (barely), next up on everyone’s mind is how president-elect Joe Biden’s tax proposals may impact you.
Before we get into the details of some key proposals and planning opportunities, it is important to note there are still many unknowns. Crucially, it will not be clear until early-to-mid-January 2021 which party will control the Senate, the result of two run-off races in Georgia taking place on January 5. The outcome will have a huge impact on the kind of tax changes Biden can enact.
If Republicans win the Senate, it is possible Biden and the Democrats may be able to compromise on more moderate tax changes by extending certain provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) that are set to expire at end of 2025. There is also the possibility that the Democrats can use the budget reconciliation process (like TCJA), which does not require Senate majority to pass tax changes.
Looking Ahead to New Tax Laws
While we wait for more clarity in the upcoming weeks, below are some key provisions from president-elect Biden’s tax plan that can prompt ways to start planning tax strategy before the end of 2020.
One of the most talked-about proposals in the Biden Campaign’s tax plan is the increase of the top individual income tax rate from 37% to 39.6%. Although Biden has campaigned on the fact that he will not raise taxes on individuals making less than $400,000, he has not provided any further details on whether this accounting will be based on total income, adjusted gross income (AGI), taxable income, or some other threshold. Another item that remains unclear is how this amount will be adjusted based on filing status.
You may want to consider accelerating income into 2020 to take advantage of lower rates. Another important consideration is if 2020 will be a lower-income year for you due to the pandemic; if so, it may make sense to accelerate income in 2020 while you are in a lower tax bracket.
One tax strategy that is often discussed is to push deductions into a tax year where you will be in a higher tax bracket so as to receive a greater benefit. It is important to note here that Biden’s tax proposals include an overall cap on itemized deductions (28%) for high-income taxpayers and reinstating the PEASE limitations. Careful planning around these proposals will be important to ensure you are getting the greatest benefit for your deductions.
While considering deductions it is important to note a few changes to charitable contributions for the 2020 tax year due to the CARES Act passed earlier this year. Section 2104 of the CARES Act allows individuals who do not itemize their deductions to deduct $300 of qualified cash contributions as an adjustment to adjusted gross income (AGI). In addition, the AGI limit on cash contributions is increased to 100% percent of your AGI, up from 60% for 2020.
Another change that has been discussed among Democrats is the repeal or modification of the state and local tax (SALT) limitation. Currently an individual is limited to a $10,000 deduction for state and local taxes paid, including real estate taxes. This is reduced to $5,000 for those using the married filing separate filing status. While Biden has not put forward specific guidance on the SALT limitation, it has been a desire of Democrats for a while. Since there is no current benefit to prepaying state or local taxes, it is best to wait and see how this plays out.
Estate and gift tax exemption
The current estate and gift tax exemption for 2020 is $11.58 million per individual and is increased to $11.7 million per individual for 2021. These exemptions allow taxpayers to pass their assets after death estate-tax-free up to the certain exemption amounts.
Democrats want to see these exemption amounts closer to pre-TCJA levels or less. Consider using some of your gift and estate tax exemption now in the event the exemption drops down to lower levels.
Other specific items Biden plans to implement:
- Levy an extra 12.4% Social Security tax on employees earning $400,000+. That will be in addition to the 12.4% Social Security tax already applied to the first $137,700 of wages or self-employment income.
- Tax long-term capital gains and dividends at 39.6% on incomes of $1M+.
- Cancel the 20% Qualified Business Income (QBI) deduction for incomes of $400,000+
- Raise the corporate income tax rate to 28%, much higher than the 21% dictated by the TCJA but not as high as the pre-TCJA rate of 35%.
- Create a new corporate minimum tax that would call for businesses with financial statement income of $100 million+ to pay whichever is greater: their regular corporate income tax or a 15% tax on their financial statement income.
- Expand the Earned Income Tax Credit for childless workers age 65+
- Establish a $15,000 tax credit for help first-time homebuyers.
- Increase tax credits for childcare.
Plan for These and Other Changes
We have a long way to go before Joe Biden is putting his John Hancock on any legal changes to taxation. But it’s always good to be prepared. And since he’s provided so many details of his plans, digging into them now will help you make strategic decisions sooner rather than later.
Getting a professional tax team with a thorough understanding of these changes can give you peace of mind. Contact your Wiss team to discuss how we can help you.