How Might Taxes Change Under President-Elect Biden
How Might Taxes Change Under President-Elect Biden
By Joseph A. Mastriani, CPA/PFS, CFP | Shareholder| Buckno Lisicky & Company CPAs
With the official presidential transition underway, in addition to all 50 states having certified their presidential election results, President-elect Joe Biden will be inaugurated on January 20th as the 46th President of the United States. However, although we may have a new President in office, it remains to be seen whether a Biden administration will be able to pass any form of meaningful tax legislation, at least in the next two years.
The reason? Democrats currently own a majority in the House of Representatives. The Senate, however, remains unresolved: 50 of the 100 seats belong — or will soon belong — to Republicans, with 48 more in the hands of Democrats or independents who caucus with Democrats. The remaining two seats — both in Georgia — will be decided on January 5th runoff elections after none of the candidates for either seat was able to obtain the 50% of votes necessary under Georgia law to claim victory. If Democrats win both senate seats in Georgia, there will be a 50-50 tie in the Senate, with Vice President-elect Harris holding the tie-breaking vote. Based on this scenario and assuming there are no defections of Senate Democrats, there exists a possibility that the new administration could pass tax legislation by the narrowest of margins. It would be effective for tax year 2021 at the earliest, and based on some or all of the following Biden campaign proposals:
- Raise the current top marginal tax rate from 37% to 39.6% on single taxpayers currently making over $520,000 and married taxpayers making over $620,000; all other current tax rates would remain the same
- Increase the top rate on long-term capital gains and qualified dividends from 20% to 39.6% for taxpayers earning more than $1 million and the step-up in basis for capital gains taxation would also be eliminated
- Increase the current corporate tax rate from 21% to 28% for C Corporations
- Repeal the 20% Qualified Business Income (QBI) Deduction for high-income taxpayers with taxable income over $400,000
- Impose a 12.4% Social Security payroll tax for wages above $400,000, thereby creating a donut hole where wages between the current wage cap of $137,700 and $400,000 are not taxed.
- Reinstate limitations on allowable itemized deductions for taxpayers with income over $400,000
- Increase the top estate tax rate from 40% to 45%, while decreasing the estate tax exemption from $11.58 million to $3.5 million
While the proposals above primarily affect high-income taxpayers, President-elect Biden’s plan also provides the following tax incentives for lower income taxpayers:
- Expand the earned income tax credit (EITC) for older taxpayers
- Expand the child tax credit from $2,000 to $3,600 per child
- Expand the child and dependent care credit from $3,000 to $8,000 per child or $16,000 per family
- Reestablish the First-Time Homebuyers’ Tax Credit to provide up to $15,000 for first-time homebuyers
- Provide $5,000 tax credit for family caregivers providing long-term-care to the elderly
Again, it remains to be seen whether any of President-elect Biden’s tax proposals will ever become law, but we wanted you to be aware of how you could fare based on your current income level.