I’ve gotten a few calls from clients concerned about rising tax rates in a Biden administration. There is no question that he and his administration have signaled taxes will be increasing (on some). Below I highlight the items that seem most relevant to our clients.
Ordinary Income Rates
As of now, Biden has proposed raising rates only in the highest bracket. That bracket (starting at $620k Married AGI) would bump the marginal rate for those taxpayers from 37 to 39.6%. This was the rate in effect prior to the Tax Cuts and Jobs Act (TCJA) passed in 2017. At this point, I have not seen any proposals to increase income tax rates for incomes below that bracket threshold.
Long Term Capital Gains/Qualified Dividends
Income from assets held for longer than 1 year have long received preferred tax rates. Most taxpayers pay a 15% rate of long terms capital gains and qualified dividends (although there is a 20% bracket for higher income taxpayers). Biden’s plan would remove the preferred rate but only for taxpayers with more than $1 million in income. As of now, there is no proposal that I am aware of that would impact taxpayers below that income amount.
Elimination of the 20% QBI (Qualified Business Income) Deduction
A cornerstone of the 2017 TCJA, the QBI deduction effectively subjected small business taxpayers to a lower tax rate on their business earnings. It is confusing and a bit cumbersome but it, no doubt, reduces tax bills for many small business owners. This applies to partnership, S Corporation or sole proprietorship income. Biden’s plan would phase-out the deduction for taxpayers with income in excess of $400K.
Currently both a worker and their employer pay 6.2% into the Social Security Trust Fund for income up to the Social Security Wage Base ($137,700 in 2020). No FICA tax is paid on income in excess of that Wage Base. Biden’s plan would continue with this policy but have the FICA tax reimplemented on income in excess of $400k. Essentially a person earning, say, $450k would pay the FICA tax up to the Wage Base and then AGAIN on the income between $400k and $450k. The income between the Wage Base and $400k would NOT be subject to FICA.
There are a litany of other proposals being kicked around. They include:
- Changes to calculation of itemized deductions for those with incomes over $400k
- Change to Corporate Income tax rates
- Considerable change to Estate Tax including elimination of the so called “stepped-up” basis
Not everything in his plan is tax increases. There are proposals for increasing the following tax credits and deductions:
- Increase in the Child Tax Credit from $2k/child to as much as $3,600/child
- Expansion of the Child and Dependent Care Credit
- A new Renter’s Credit for those taxpayers that are renting
- A new Caregiver’s Credit for taking care of elderly relatives
- First Time Homebuyer’s Credit (this existed in the past in response to the 2008 financial crises)
- Expansion of the Earned Income Tax Credit
How Will This Affect You?
Obviously, these are just proposals. There is no telling if they will be passed in their current form or be adjusted while going through the political process. My guess is the latter. Proposals will meet with opposition and changes will be made. Increasing tax burdens is almost never a popular legislative initiative. There also is likely to be a Senate that is not friendly to his tax proposals, but that won’t be certain until the Georgia Senate runoffs are over.
I’m not sure there is enough clarity for any of these proposals to determine an action you should take. Should you hurry up and generate a capital gain under the current tax environment? Should you pull other income into 2020? Should you push deductible expenses into 2021 rather than incur them now? All of these are good questions that I don’t think anyone can answer with certainty right now. Biden has consistently messaged that the tax increases will be targeted on taxpayers making in excess of $400k. Time will tell if that is a line in the sand or a negotiating point.
Bottom line: if you are concerned about future tax rates, please contact us before you do something rash. We can discuss your options and come to an informed decision with all of the facts at your disposal.