In a previous post, I broke down the various provisions of the Trump and Biden tax plans in a comparative chart. With the election over, and some certainty returning to DC, we can now begin to plan for what taxes will look like in the future. I’ll break down most of what we know about Biden’s tax plan for individuals and businesses.
Biden’s Tax Plan for Individuals
General Provisions
The tax plan that Biden campaigned around contained changes to many laws, including:
- Reversing the rate changes implemented under Trump’s Tax Cuts and Jobs Act (TCJA), which would raise rates back to pre-TCJA levels, including returning the maximum marginal rate to 39.6%
- Taxing higher earners (individuals and joint filers with more than $1 million in adjusted gross income) at their marginal rate on capital gains (39.6%). For all others, preferential rates of 0, 15, or 20% would apply to long-term capital gains.
- Expansion of the Child and Dependent Care Credit to $8,000 (max of $16,000 per family) for families making under $125,000. The credit would phase out between $125,000 and $400,000 or income, and be unavailable for families who make more then $400,000.
- Expansion of the Earned Income Tax Credit for taxpayers over age 65.
- Raising the estate tax rate to 45%, reducing the lifetime exemption amount to 3.5 million (from the current $11.58 million), and eliminating the step up in basis for inherited assets.
In addition, Biden will introduce some new tax credits:
- Homebuyer Tax Credit – Similar to the old First-time Homebuyer Credit enacted after the 2008 financial crisis, but worth $15,000 per individual ($30,000 for joint filers) and made permanent.
- Renter’s Tax Credit – A tax credit aimed at low-income renters, which would effectively cap their rent expense at 30% of their total income.
- Informal Caregiver Credit – Similar to the Child and Dependent Care Credit in effect now, but expanded to include family & close-friend caregivers who might not normally be paid. The idea behind the credit is to protect the retirement income of people tasked with caring for aging friends and family members. The credit is worth $5,000.
The $400,000 question
The idea of a substantial tax increase — or a decrease in available deductions and credits — for people earning more than $400,000 has been a consistent theme during the campaign. Here are some of the areas where the $400k number shows up in Biden’s tax plan:
- Wages in excess of $400,000 would be subject to social security tax. Under current law, all wages that exceed $137,700 are exempt from social security tax. Biden would levy social security tax on wages below $137,700 and on wages that exceed $400,000. Amounts in between those two thresholds would not be taxed.
- Some tax credits such as the Child and Dependent Care Credit will be phased out once families reported $400,000 of income.
- The 20% QBI deduction could be eliminated for individuals earning more than $400,000.
- Biden would phase out itemized deductions for taxpayers with incomes over $400,000. Currently, there is no limitation on itemized deductions, although individual deductions may be limited based on income.
Biden’s Tax Plan for Businesses
Biden desires to raise the corporate tax rate to 28% and institute a minimum tax of 15% on book profits for larger businesses. He also wants to expand the GILTI (Global intangible low-taxed income) tax rate from 10.5% to 21%.
Biden plans to maintain the current tax law as to bonus depreciation. This will allow for 100% bonus depreciation through the year 2022, after which it will start to get phased out. Assuming no extender bills are passed, bonus depreciation will expire at the end of 2026.
Biden hopes to reverse the TCJA’s amortization requirement and let businesses fully deduct R&D expenses in the year which they are incurred.
In addition, one of Biden’s biggest changes to the corporate tax code is likely to be his “Made in America” tax credit. This 10% credit would be made available to businesses that create manufacturing jobs for U.S. workers. It would be given to companies that:
- Reopen a closed factory (or a factory in the process of closing)
- Refurbish existing facilities to help advance manufacturing technologies
- Bring service or production jobs back to America
- Expand current facilities to enhance production capacities
- Increase manufacturing payroll for American workers
So, there are a lot of changes coming down the pike. What remains to be seen is whether Biden will ride into town with the support her needs to get some, or all, of these changes pushed through into law in a short time. We will have to keep an eye on the Georgia runoff elections in January to know what kind of momentum Biden will have behind him when he arrives. It isn’t infeasible to imagine all of these changes coming within the 2021 tax year — after all, Trump’s TCJA made it through Congress and into law very quickly after it was first proposed. As we’ve learned in the past 6 month or so, when it comes to Congress, the only certainty is change. But, with Biden now taking over, we have some idea of what that change may entail.
