November 12, 2020
Dear Clients and Friends:
While the election results, still may not be final, many of our clients are asking, “Are my taxes going to go up with a Biden presidency?” There is no certainty yet for many reasons, but mostly because of Senate seats that will not be decided until January. However, if Democrats win both Senate seats, and then the House and Senate pass a joint budget, there is a good chance Biden’s tax proposals could become law. And since that is looking like a real possibility, we present below our summary of the potential changes. (For a good source of this information, see generally,
Generally, Biden aims to raise nearly $3.5 trillion in additional tax revenue. While this sounds like a tax increase for one and all, he has repeatedly contended that those taxpayers earning less than $400,000 annually will not experience any increase in their tax bills. Presented below is how that looks, where he succeeds in that goal, and where he might fail. We look first at personal income taxes, then corporate, and finally, estate taxes.
Personal Ordinary Income
Current Personal Tax Law: U.S. tax law is in what is called, a progressive system, meaning we theoretically pay higher rates as our income increases. Under the current structure, those income tax rates begin at 10%, and then climb to a maximum of 37% via the following steps: 12%, 22%, 24%, 32%, and 35%.
Biden’s Plan: Biden has proposed raising only the top rate of 37%. This 37% rate, which currently is for single taxpayers with income in excess of $520,000 and married taxpayers with income in excess $620,000, would increase to 39.6% (where it was prior to Trump’s administration).
Personal Long‐Term Capital Gains and Qualified Dividends
Current Tax Law: Long‐term capital gains and qualified dividends are currently taxed at a high of 20%, though most American’s pay 15%, with those in the 10% and 12% brackets paying 0%.
Biden’s Plan: Biden would only increase the top rate on long‐term capital gains and qualified dividends for taxpayers earning more than $1 million per year. For the latter, the rate would increase from 20% to 39.6%.
Current Tax Law: If you earn money through wages or are self‐employed, you pay all or part of your income tax through your payroll deductions. In the employer‐employee context, the employer and employee split a 12.4% tax on earnings up to the Social Security wage base, which in 2020 is $137,700. For all wages, the employer and employee split a 2.9% Medicare tax. If you are self‐employed, you must pay for the full 15.3% (though you do get to deduct half of the taxes on your return). Finally, those who earn more than $250,000 (if married, $200,000 if single), are subject to an additional 0.9% payroll tax.
Biden’s Plan: Biden intends to cure the solvency of the Social Security fund by lifting the cap on the Social Security payroll tax, but once again, only on wages in excess of $400,000. This would create what some advisors refer to as a “donut hole.” An employee who is paid a $500,000 salary would pay the 6.2% Social Security tax on the first $137,700, no Social Security tax on wages from $137,700 to $400,000, and then another 6.2% tax on the wages between $400,000 and $500,000. He or she would also pay the 1.45% Medicare tax on all wages and the 0.9% Obamacare tax on wages over $250,000 (if married).
Partial Reduction of the 20% Qualified Business Income Deduction
Current Tax Law: Allows taxpayers who operate businesses to claim a deduction equal to 20% of the “qualified” income earned in the business. This reduces the effective top rate on this type of income from 37% to 29.65%.
Biden’s Plan: Biden would phase‐out the deduction – but again, only for those taxpayers with taxable income in excess of $400,000.
Current Tax Law: Taxpayers are entitled to deduct the greater of 1) the standard deduction, or 2) the sum of the itemized deductions (things like mortgage interest, medical expenses, state and local income and property taxes, and charitable contributions). The current law nearly doubled the standard deduction (from $6,350 to $12,400 for single taxpayers, $12,700 to $24,800 for married couples), however at the same time, it limited or eliminated certain itemized deductions, in a bevy of changes that decreased the number of filers who actually itemize their deductions from 30% in 2017 to 11% in 2018.
Biden’s Plan: Biden would make two changes to itemized deductions. First, for those earning in excess of $400,000, he would reinstate the “Pease limitation” which reduces a taxpayer’s total itemized deductions by 3% for every dollar that income exceeds $400,000.
In addition, Biden would cap the benefit of itemized deductions at a 28% rate and has promised that the 28% benefit limitation on itemized deductions would not kick in until income exceeds $400,000.
Current Tax Law: One of the keys to the Trump plan was the reduction in the corporate income tax rate from 35% to 21%.
Biden’s Plan: Biden would raise the corporate rate to less that it was before Trump, but to more than it is now. He would raise it to 28%. In addition, he would implement a new form of the “alternative minimum tax” by requiring corporations with financial statement income in excess of $100 million to — at the very least — pay tax of 15% on its financial statement income.
Current Tax Law: When you die, if you are part of the richer folk and have an estate worth more than $11.58 million, your heirs are currently taxed at a rate of 40% on the excess over that amount. (So, the amount of your estate under $11.58 million is “exempt” from estate tax). Equally as important, under current law, when you die, your heirs take your assets with a “stepped‐up” basis which equals the fair
market value of the assets upon your date of death. Accordingly, any appreciation the estate assets realized during your lifetime will not be taxed if their total is less than $11.58 million. That being said, under current law estate assets will be taxed to the extent that the after‐death value exceeds $11.58 million.
Biden’s Plan: Biden is proposing sweeping increases to the estate tax regime. The estate tax rate would rise to 45%. The exemption would drop to $3.5 million and the “step up” in basis would be eliminated so that all the increase in value of your assets during your lifetime would be taxed as those assets are sold by your beneficiaries.
Summary of Tax Increases:
According to the Tax Policy Center, Biden’s tax changes for those earning between $400,000 and $790,000 would result in an increase of about 2.4%, for an average tax hike of $9,000. Those who earn more than $790,000 (the “one‐percent” so to speak) will experience a much larger increase, amounting to about 16% for an average tax increase of $265,000. The biggest reason for the incremental jump is the near doubling in dividend and capital gains tax rates that applies only when income exceeds $1,000,000, as well as the changes to the estate tax.
Biden’s Tax Cuts via Tax Credits
The present Biden plan is not all about tax increases. He has also proposed a number of cuts, in the form of additional tax credits ‐‐ some of which are refundable. As a result of these credits which are detailed below, the Biden plan would actually decrease the tax bills of many American families who need it most. For example, a family earning between $88,000 and $160,000 would get an average cut of $540, while one with income between $50,000 and $90,000 would get a cut of $920.
Biden’s proposed credits, include the following:
∙ An expanded child tax credit. The credit, which currently tops out at $2,000 — with only $1,000 of that amount being refundable — would be increased to a maximum of $3,600 per child and would become FULLY refundable.
∙ An expanded child and dependent care credit. The credit would be increased from a maximum of $3,000 to a maximum of $8,000, or $16,000 per family. Fifty percent of the credit would be refundable.
∙ A new $5,000 credit would be created for caregivers of elderly relatives,
∙ A new credit of up to $15,000 for first‐time homebuyers,
∙ An expansion of the existing premium tax credit that makes state‐sponsored health plans more affordable,
∙ A renter’s credit to reduce rent and utilities to 30% of income, and
∙ An expansion of the earned income credit to older taxpayers.
Whether your tax bill will go up or down depends on a number of factors – some of which you cannot control:
First, it depends on whether Joe Biden’s victory withstands the Trump legal challenges. That is hard to predict with certainty, but some judges have already thrown out the lawsuits. Second, it depends on whether residents of Georgia elect Democrat Senators in the run‐off election in January. If they do, then the Republicans in Congress will have a hard time stopping Biden’s tax proposals. Third, it requires that all the Democrats in the Senate follow party lines and vote for a Biden tax proposal, Finally, even if all of those items happen, the income impact to you and your family depends on whether you’re on the higher or lower end of the income scale. If you make over $400,000 per year, prepare to pay more. And if you inherit an estate over $11.58 million (we should all be so lucky), prepare to pay a lot more in estate taxes.