20
May

The Democrats now control the White House and both chambers of congress, and as a result it is very likely that new legislation will be introduced to raise taxes.  While we do not yet know the specifics of this potential legislation, we can look to the tax policy details promulgated by the Biden campaign in the run up to the election.[1]

Even if no congressional action is taken, there are significant tax rules that may change or expire in the coming years due to the existing provisions of the Tax Cuts and Jobs Act of 2017.  The 20% qualified business income (QBI) deduction for pass-through entities is set to expire after 2025.  Also, business entities are currently able to fully expense research and development costs, but this is set to expire at the beginning of 2022.  Companies will then be required to capitalize these costs and amortize them over a five-year period.

Additional changes may be in store if a Biden Tax Plan is passed.  The table below lists some of the more noteworthy aspects of the possible tax changes, compared to current law.

[1] For more details, see Garrett Watson et al., “Details and Analysis of President-elect Joe Biden’s Tax Proposals” October 2020, https://files.taxfoundation.org/20201109095935/Details-and-Analysis-of-President-Elect-Joe-Bidens-Tax-Plan.pdf

Individual Tax Rates:

Currently, married couples filing jointly will pay a 35% rate on taxable income over ~$415,000 and a 37% rate on taxable income over ~$622,000.  Biden’s plan would impose a 39.6% rate on taxable income over $400,000.

Capital Gains:

Long-term capital gains are currently taxed at 0%, 15% or 20%, depending on one’s taxable income and filing status.  For married couples filing jointly, the rate Is 0% for those with taxable income up to $80,800, 15% for those with taxable income up to $501,600, and 20% for those with taxable incomes beyond that.   The Biden Tax Plan would tax long-term capital gains at the same rate as ordinary income for those taxpayers with over $1,000,000 in income.  It should be noted that, in connection with the changes to the income tax rates noted above, this would push the long term capital gains rate to 43.4% on these taxpayers (39.6% plus the Net Investment Income Tax of 3.8%).

Social Security:

For 2020, a 12.4% social security tax was withheld on wages up to $137,700 (6.2% for the employer and 6.2% for the employee); this is increased annually: for earnings in 2021, the tax is withheld on up to $142,800 of wages.  The Biden Tax Plan would continue this practice of annual escalation but would also impose these taxes on any wages above $400,000.

Estate Taxes:

Death taxes are set to spike under a Biden Tax Plan.  The current federal estate tax exemption is $11.7 million per person or $23.4 million for a married couple.  This is scheduled to sunset at the end of 2025 to an inflation-adjusted $5 million per person (or around $7 million).  Under the Biden Tax Plan, the estate tax exemption would shrink to $3.5 million per person, with no adjustments for inflation.  The plan would also lower the lifetime exemption for gifts to $1 million.

Estates (or gift transfers) exceeding the above referenced exemptions would be taxed at a rate of 45%.  The current estate tax rate is 40%.

Basis Step-up:

Under current tax law, the basis in appreciated property (like real estate or stock in a corporation) transferred at death is stepped up to the fair market value of the property as of the date of death.  The Biden Tax Plan would not only eliminate this provision of the tax code, but it would also impose a new tax on any unrealized gain of any appreciated property held by a taxpayer with an income above $400,000.

Corporate Tax Rate:

The Tax Cuts and Jobs Act of 2017 reduced the corporate income tax rate from 35% to 21%.  The Biden Tax Plan would see it increased to 28%.

Like-Kind Exchanges:

The 1031 Exchange provides the ability for a taxpayer to defer taxes on the recognized gain (except to the extent of boot) in a sale of property because he remains invested in like-kind investment real estate.  Under the Biden Tax Plan, it may be eliminated entirely or just for those with incomes exceeding $400,000.