Now that the election of Joe Biden as President has become official, many people are wondering what federal tax policy might look like under a Biden administration?
While we don’t know the answer to this question for sure, Biden did float a number of tax proposals while he was on the campaign trail. Following are the highlights of some of these proposals.
Note: Technical details of these proposals are still forthcoming and there’s no guarantee that all (or even any) of them will become law. But given the fact that Democrats now control of both houses of Congress and the Presidency, it’s likely that any new tax legislation introduced in 2021 will contain some, if not most, of these provisions.
On the Individual Tax Side
President Biden has pledged to increase taxes on the highest earning American families. More specifically, his tax plan would raise the top individual tax rate from 37% to 39.6%, which is where it stood before enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This higher marginal tax rate would apply to earned individual income over $400,000 per year.
The Biden tax plan would also limit the tax benefit of itemized deductions for high-earning American families. This tax benefit would be capped at 28% of the amount of the deduction for taxpayers earning more than $400,000 per year.
In addition, the Biden tax plan would remove the Social Security tax cap by assessing a 12.4% Social Security payroll tax on annual wages above $400,000. This is split evenly between employees and employers but is fully paid by self-employed individuals. This payroll tax currently only applies to annual income up to $142,800, so there would be a “donut hole” in which earned income between $142,800 and $400,000 would not be subject to payroll tax.
One of the more unique provisions of the Biden tax plan is the replacement of the deduction for IRA, 401(k) and 401(b) retirement plan contributions with a new refundable tax credit that’s equal to a percentage of the amount of the contribution (such as 26%). According to the Biden administration, this would enable low- and middle-income workers to receive the same tax benefits that upper-income workers receive when contributing to these retirement accounts.
Here are a few more Biden individual tax proposals that could become law this year:
• Elimination of capital gains tax preference— Long-term capital gains and qualified dividends would be taxed at the top ordinary income tax rate of 39.6% on annual income that exceeds $1 million.
• Phaseout of qualified business income (QBI) deduction — Also known as the Section 199A deduction, this provision of the TCJA would be phased out for taxpayers earning more than $400,000 per year.
• Expansion of the Child and Dependent Care Tax Credit (CDCTC) and the Child Tax Credit (CTC) — The CDCTC would be increased from a maximum of $3,000 to $8,000 in qualified child and dependent care expenses (or $16,000 for multiple dependents). Meanwhile, the CTC would be increased from a maximum value of $2,000 to $3,000 for children who are 17 years of age or under, with a $600 bonus tax credit for children who are under 6 years old.
• Expansion of the Earned Income Tax Credit (EITC) and energy tax credits — The EITC would be expanded to childless employees who are over 65 years of age, while renewable energy-related tax credits would be extended to individuals.
• Renewal of the First-Time Homebuyer’s Tax Credit — This tax credit, which was originally introduced during the financial crisis to help spur home ownership, would be renewed, providing up to $15,000 to first-time homebuyers.
On the Business Tax Side
President Biden has pledged to increase the corporate income tax rate from 21% to 28%, which is where it stood before enactment of the TCJA. His plan would also assess a new corporate alternative minimum tax (AMT) on corporations with annual book profits of at least $100 million at a rate equal to 15% of book income.
In addition, the Biden tax plan would assess a new 10% corporate surtax on corporations that offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market. This would raise the effective corporate tax rate on these businesses to 30.8%.
Here are a few more Biden business tax proposals that could become law this year:
• Increase in the Global Intangible Low Tax Income (GILTI) tax rate — The rate on this tax that’s derived by foreign subsidiaries of U.S. multi-national corporations would double from 10.5% to 21%.
• Creation of a new 10% “Made in America” tax credit — This tax credit would apply to corporate activities that “restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.” The credit could be claimed when expenses are incurred rather than when corporations file their tax returns.
• Creation of new small business retirement plan tax credits — These tax credits would be offered to small businesses that offer workplace retirement savings plans to their employees.
Again, none of these proposals has become tax law yet. Keep an eye on the news this year for the latest tax developments and let us know if you have any questions about how these and other tax law provisions could affect your personal financial situation.