Aldrich Advisors recently hosted a webinar on What We Know About President Biden’s Tax Plan. The Biden administration has proposed significant changes to federal policy in several areas—but what will this new presidency mean for taxes?
There is a great deal of uncertainty about what changes Congress might make to Tax Code during Biden’s presidency. Congress has a full plate, and it is not yet determined when its focus will shift to an updated tax plan.
However, based on what has been shared on the campaign trail, if you are a business owner with a significant income, if your business is a C Corporation, or if you do business with certain offshore entities, you might need to prepare for higher tax rates or other changes.
Expiring Provisions of the Tax Cuts and Jobs Act
Regardless of Congressional action, tax changes are coming. Several provisions from the TCJA are expiring in the near future. Unless extensions or other modifications are passed, taxpayers should plan for these terms and conditions to end.
Here are a few significant TCJA tax rules that may change or expire in the next few years and what Biden has proposed related to these rules, if anything.
Qualified Business Income Deduction
The 20% qualified business income deduction for pass-through entities is set to expire after 2025, but it could sunset sooner for those with an income of $400,000 or more. This deduction was a significant change in the TCJA that continues to affect many business owners. The proposed change would increase the top tax rate on pass-through income by about 10%.
Additionally, the State and Local Tax (SALT) deduction limitation of $10,000 per household are also set to expire at the end of 2025. This limitation has been a point of debate since it became law in 2017. For those who live and work in states with higher income tax, the SALT limitation sometimes results in higher taxes.
Research and Development Expenses
Without an extension or change to tax law, companies will be required to capitalize research and development costs and amortize those costs over five years starting in 2022 due to TCJA. Previously, businesses could fully expense research and development costs.
Possible New Tax Proposals from President Biden
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.
Tax Planning with Aldrich’s Help
As of now, Congress is not yet reviewing or approving any tax reform legislation. Because of complicated Senate rules about Budget Reconciliation, President Biden and Congress may not tackle these changes until after the next voting cycle in 2022.
Reach out to your Aldrich Advisor to help evaluate your individual and business tax plan. As new changes are announced, we will keep you updated on strategic moves to manage your tax obligations.
Meet the Author
Carrie Sowders, CPA
Aldrich CPAs + Advisors LLP
Carrie leads our Manufacturing group at Aldrich and specializes in serving large and middle market companies, primarily in the consumer and industrial products sectors. Carrie has exclusively practiced in tax since beginning her career in 1998. Prior to joining Aldrich in 2009, Carrie spent a decade with Deloitte and oversaw the tax function of a... Read more Carrie Sowders, CPA
- Certified Public Accountant
- Manufacturing tax
- Consumer business
- Multinational corporate issues
- Tax accounting and methods