One of President Biden’s priorities during his term will be his tax plan, which aims at repealing many provisions that were signed into law by former President Donald Trump in 2017 under the Tax Cuts and Jobs Act (TCJA). Below are several changes President Biden is proposing to make in regards to taxes:
Corporate Income Taxes
The TCJA permanently reduced the corporate tax rate from up to a maximum rate 35% under a graduated rate system down to a flat 21% rate on all taxable income. Under Biden’s tax proposal, this flat rate will be increased to 28%. Additionally, Biden’s proposal will implement a 15% minimum tax on corporations that have book income in excess of $100M, but do not have any taxable income for that same year. This provision is similar in nature to the Alternative Minimum Tax (AMT) that was previously in effect for corporations and subsequently eliminated under TCJA in 2017.
Social Security Taxes
Currently, employees pay a 6.2% Social Security tax on wages up to $137,700, and employers pay a matching 6.2% tax on those same wages. While Biden’s tax plan does not increase the Social Security tax rate, his plan does call for employees and employers to be subject to the Social Security tax on income greater than $400,000. Wages between $137,700 and $400,000 would not be subject to this tax.
Individual Income Tax Rates
One of the main provisions of the TCJA was a reduction in individual income tax rates, reducing the highest tax rate from 39.6% down to 37% for all taxable income over $518,400 for single filers and $622,050 for joint filers. Biden’s plan increases the highest tax rate back up to 39.6% and this rate will be imposed on taxable income greater than $400,000.
Dividends and Capital Gains
Qualified dividends and capital gains are currently taxed at either 0%, 15% or 20% based on taxable income. Under Biden, this tax rate will increase to 39.6% on income greater than $1M.
Biden’s plan also aims at restoring the limitations of itemized deductions. Itemized deductions reduce a taxpayer’s adjusted gross income (AGI) towards arriving at taxable income, and includes deductions such as state and local taxes, mortgage interest, and charitable contributions. This limitation was suspended under the TCJA for the tax years 2018 through 2025. Taxpayers with taxable income greater than $400,000 will be subject to the limitation. Additionally, Biden plans on capping the value of these deductions to 28%, meaning that taxpayers in higher tax brackets will only be able to deduct 28% of their itemized deductions. While these limitations will hurt the pockets of high-income taxpayers, one benefit that will be restored under Biden’s plan is the elimination of the state and local tax deduction limitation under the TCJA.
Currently, they are capped at $10,000, and Biden’s plan will remove this cap, although they will be subject to the itemized deduction limitation mentioned above.
Qualified Business Income
The Qualified Business Income (QBI) deduction was created as a result of the TCJA in 2017 under Section 199A of the Internal Revenue Code. This deduction allows non-corporate business owners a deduction of 20% of their income from a qualifying trade or business. This deduction is subject to limitations based on the type of trade or business, W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property owned by the trade or business. This deduction is currently allowed for tax years 2018 through 2025, and is not a component of the itemized deductions listed above. Biden’s plan will eliminate this deduction on income greater than $400,000.
A huge boon for corporations and business owners in reducing their tax liability has been the TCJA changes pertaining to bonus depreciation. Under the TCJA, 100% bonus depreciation can be taken on qualifying capital expenditures such as machinery, equipment, trucks, and tanks. While the bonus depreciation rules are in effect until December 31, 2025, it will gradually be phased out by 20% each year beginning January 1st, 2022 until fully exhausted December 31, 2025. If Biden is successful in repealing the TCJA, this would effectively eliminate the bonus depreciation provisions.
Tax Deferred Exchanges of Real Estate
While the TCJA eliminated like-kind exchanges of personal property under Section 1031, real estate is still eligible for like-kind exchange treatment. This allows taxpayers to defer the gain on the property exchanged until the property received is ultimately sold. Biden’s proposal would eliminate tax deferred exchanges on real property as well.
Under the TCJA, the lifetime exemption of assets that can be excluded from the calculation of the estate tax doubled, allowing a married couple to exclude up to $23.6M of assets. This is in effect until December 31, 2025 when it reverts back to pre-TCJA amounts. Heirs also receive a step-up in basis to the fair market value at the date of death of the decedent for inherited property, allowing heirs a tax break when the property is ultimately sold. Under Biden’s proposal, the step-up in basis heirs receive on property would be eliminated and they would instead “step into the shoes” of the decedent, and potentially leave them with a large tax liability when the inherited property is sold.
While these are currently far from being law, this should give some insight on the direction Biden may be pushing and it is possible that some or all of these will be enacted into law at some point. With proper planning, the unfavorable tax impact of these changes can be mitigated or even eliminated. Please consult your tax advisor to discuss the impact Biden’s changes can have on your taxes.
While these are not yet law, it is possible that some or all of these will be enacted into law at some point. With proper planning, the tax impact of these changes can be mitigated or even eliminated. Consult your tax advisor to discuss the impact President Biden’s changes can have on your taxes.
This article was originally published by MPA/MACS Marketer Magazine.