We are still waiting to see specific new tax proposals from the Biden administration and a Congressional discussion and approval timeline. It might be the end of 2022 before tax reform makes it to the top of the legislative agenda. However, based on what we heard from President Biden during the campaign, we’ve compiled a few of the ideas that may eventually make it into law.
Increased Tax Rates for Income over $400,000
Biden’s campaign promised to increase the top individual tax rate from the current 37% to 39.6% for taxpayers earning more than $400,000. Without a full proposal detailing the exact implementation, many questions remain. For example, what about those who make slightly under $400,000 and are currently in the 32% tax bracket? So far, the $400,000 income threshold is the primary focus. Creating an almost 8% jump in the tax rate would mean the largest gap in our tax bracket system in recent history, and thus we would assume some additional changes in rates would accompany this top rate change.
Higher Capital Gains Tax for over $1 Million in Income
The current tax law has long-term capital gains tax rates at 0%, 15%, and 20%, with a 3.8% net investment tax for joint taxpayers earning more than $250,000, or $200,000 for those who file as single. Biden has proposed standard tax rates on capital gains for taxpayers with over $1 million in income. Generally, those at the $1 million mark will no longer receive any tax benefit for holding investments for over a year (long-term). Typically, long-term capital gain rates have been linked with the qualified dividend rates, as well. It is unclear whether the rates would decouple or if the dividend rate would also increase.
Additional Changes to Individual Tax Rules
Based on campaign promises about Biden’s tax plan, taxpayers can likely expect changes to individual tax rules and payroll taxes:
- Child tax credit will increase from $2,000 to $3,000 ($3,600 for children under age 6).
- Cap itemized deductions at 28% of value for people earning more than $400,000 of income, and an end to SALT limits. With the cap on itemized deductions, the benefit for removing the SALT limitation is not as substantial as taxpayers would hope.
- Create a new Social Security “donut”. The Social Security wage base cap is currently $142,800 for 2021 – beyond that amount of wages, you don’t pay Social Security tax on your earnings. Biden proposed restarting the collection on Social Security tax on incomes over $400,000, creating a ‘donut’ shaped Social Security scheme known as the “Donut Proposal.” This change would also affect business owners that pay self-employment tax.
- Phase-out the 20% pass-through business income deduction for taxpayers making over $400,000.
Changes to Corporate Tax Rates
If your business is a C Corporation, the Biden administration could increase your corporate tax rate. The TCJA reduced the top corporate tax rate from 35% to 21%. Biden’s plan could increase the corporate tax rate from 21% to 28%, although 25% may be a more attainable and globally competitive rate change.
Biden also proposed a 15% minimum tax on companies with more than $100 million book net income but no federal tax. Similar to an Alternative Minimum Tax for corporations, further details are necessary because it is unlike any current law on the books.
Estate Tax Changes
Currently, estates are exempt from paying taxes if the estate is smaller than $11.7 million and the individual did not exhaust their gift tax exemption during their lifetime. Biden proposed reducing the estate tax exemption from $11.7 million to $3.5 million and increasing the top rate to 45%. Because the estate and gift tax exemptions are currently linked, individuals may want to plan for gifts now.
