Biden Tax Proposals

[Rana Goodman]

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… Biden Tax Proposals

Written By: Dick Arendt

Changing Tax Brackets

One of the Biden administration’s main tax changes is to restore the top tax bracket to the level it was before the Tax Cuts and Jobs Act was enacted in 2018. Specifically, the current 37% tax bracket will rise to 39.6%. This change will only affect those earning $400,000 or more. All other tax brackets will remain the same. On a theoretical $500,000 income, this would raise the tax on the incremental $100,000 to $39,600 from $37,000.

Increasing Capital Gains Taxes

One of the main benefits of current tax law is the capital gains tax structure. This allows those holding capital assets for longer than one year to benefit from lower tax rates on gains triggered by any sales. For most taxpayers, the long-term capital gains rate is just 15%. Those with taxable income of $80,000 or less may pay as little as 0% in tax on long-term capital gains. For singles earning $441,450 or more, or joint filers earning at least $496,600, capital gains rates jump to 20%.

Under the new Biden proposals, those earning at least $1 million will no longer benefit from long-term capital gains tax rates. These ultra high net worth individuals will have to pay ordinary income tax on their long-term capital gains.

Elimination of Step-Up in Basis

One aspect of the Biden tax plan that may affect low- and middle-income earners is the elimination of the step-up in basis. The step-up in basis applies to the cost of inherited property when it passes to heirs, which steps up to the current market value at the time of the owner’s death under current law. This eliminates any capital gains liability from passing along to heirs. However, under the Biden tax proposal, this step-up in basis will go away.

As an example, imagine that you inherit a $500,000 piece of property that cost your parents $300,000. Under current tax law, your stepped-up cost basis in that property would be $500,000, so you wouldn’t owe any tax if you immediately sold that property. If the step-up in basis goes away, you’d owe capital gains tax on $200,000 in gains under the same scenario.

Increased Income

If things go according to plan in 2021 — which is far from a certainty — the global economy will start normalizing. Widespread vaccine distribution will tame the corona virus pandemic, businesses will once again open up and unemployment will fall. Under this scenario, it’s entirely possible that your income will rise as well, particularly if you are currently out of a job. In that case, you can expect to have a larger tax bill in 2021 than you did in 2020.

Increased Social Security Taxes

One of the more dramatic proposals of the Biden tax plan is to impose the 12.4% Social Security payroll tax on earners making more than $400,000 per year. Currently, the 12.4% Social Security tax, which is evenly split between employers and employees, only applies to incomes of up to $137,700. The Biden tax structure would thus create a Social Security tax gap, with those earning between $137,700 and $400,000 not liable for any additional taxes.

Increased Corporate Taxes

If your business is a corporation, you’ll likely face higher taxes under the Biden administration. The Biden tax proposal lifts the corporate tax rate from 21% to 28%, and it also creates a minimum tax on corporations with profits of at least $100 million. This tax would ensure these corporations pay a tax of at least 15%, or more if their regular tax liability is higher.

Doubling of Global Intangible Low Tax Income

This tax change won’t apply to many Americans, but for the businesses that it applies to, it could be quite significant. Biden has proposed doubling the rate on Global Intangible Low Tax Income, or GILTI, from 10.5% to 21%. This tax applies to foreign subsidiaries of U.S. firms. In addition to this doubling, Biden intends to evaluate GILTI on a country-by-country basis. 

Cap on Itemized Deductions

The limitation on itemized deductions under the Biden tax plan only applies to those earning more than $400,000. However, these high earners will see the amount of their itemized deductions limited to 28% of their value. Under current law, itemized deductions are valued at a taxpayer’s marginal tax rate. This means that itemized deductions for high earners currently are valued at 37%, the top current marginal tax rate.

Phase-Out of Qualified Business Deduction

One of the main benefits from the Tax Cuts and Jobs Act for small business owners was the 20% qualified business deduction. This allows business owners to take an additional 20% off their income when calculating their taxable income. While the Biden tax plan does not eliminate this deduction, it does phase it out for those earning over $400,000. This will result in higher taxes for higher-earning businesses.

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