- December 06, 2020
As the dust settles on the 2020 presidential election and the transition to a new administration starts taking hold, many of us — regardless of how we voted — are wondering what policies will change and what will remain the same.
Although Joe Biden won’t officially take office until January 20, he’s already set forth a plan calling for a number of important changes that may wind up having an impact on you as soon as 2021. Though I don’t possess a crystal ball, I’ve rounded up some of the biggest changes being proposed, to help you understand how they could affect you if passed:
Increases for the VERY Wealthy
Biden and his team have put forth a plan that show increases only for those earning $400,000 per year or more. Most of us, in other words, would not be affected by those increases. In fact, much of the plan details tax breaks for the middle class (detailed below). The highest personal income tax rate for the wealthiest Americans would go from 37% — a new rate from the Trump administration — back to its pre-2017 rate of 39.6%.
Biden has stated he wants to protect Social Security by, in part, generating more income from wealthier Americans subject to Social Security taxes. Currently, wages above $137,700 are not subject to the 12.4% payroll tax shared evenly by employer and employee. Typically, employers and employees are happy to stop paying this, which incentivizes salary increases. Biden wants to reintroduce Social Security tax for those making $400,000 or more, resulting in a doughnut — a “sweet spot” between those two salaries where there’s no Social Security tax owed.
Another measure proposed affects itemized deductions for wealthy Americans. Those would be capped, meaning some deductions (mortgage interest, certain taxes) may not be 100% deductible.
Increases in Corporate Tax
Corporations enjoyed a reduction in the corporate tax rate from 35% to 21% when Trump took office. Biden has proposed a slight increase to 28%.
Limits on Like-Kind Exchanges and Step-Up Basis for Inherited Assets
Many real-estate investors take advantage of this option to skirt capital gains on appreciation. In a like-kind exchange, someone who purchased a building years ago might now find themselves, thanks to a strong real-estate market, the owner of a building that’s now worth twice that. Taking advantage of the appreciation without paying the capital gains tax on the added value has been achieved using the Section 1031 exchanges (an appreciated old building is “exchanged” for another one using a rather strict set of procedures). As the result, the seller delays the tax burden while growing their real-estate portfolio. Using this type of exchange, an investor could foreseeably keep buying and selling property, passing it to their heirs without ever paying taxes on the appreciation.
This is thanks to the step-up basis that enables individuals to transfer property to heirs at fair market value upon death, meaning that they have no appreciation to account for on their tax return.
Biden’s tax plan would limit or even prohibit like-kind exchanges and the step-up, so for property owners, it’s an area to keep a close eye on.
Changes to Favorable Tax Rates and Capital Gains for Millionaires
Currently, favorable capital gains tax rates of 23.8% apply to everyone (there are also 0% and 15% rates available for taxpayers in lower tax brackets). Biden has proposed using ordinary tax rates (39.6%) on capital gains realized by taxpayers earning over $1 million a year. This change could have significant effects on high-income individuals reliant on favorable rates as part of their investment strategy.
Lowered Threshold for Estate Tax Exemption
As the law stands today, when an individual dies, if his or her estate is valued at $11.58 million or less, the estate pays no estate tax at all. Biden has proposed lowering that threshold to $5 million — a pre-Trump-era threshold. Estate tax has never been a huge source of revenue for the government, but the increased threshold did benefit the ultra-wealthy. A lower threshold could potentially affect a much larger swath of Americans.
Penalties for Big Pharma
It’s no surprise that Biden wants to keep and improve Obamacare, and he’s proposing one change that could benefit Americans with chronic conditions. His proposal includes tax penalties for pharmaceutical companies who increase drug costs by more than the rate of inflation, which could ensure more predictable, affordable drugs, while also removing their deductions for advertising expenses — a move that could mean we’re forced to sit through fewer of those long ads filled with disclaimers! He also looks to eliminate any tax incentives for those companies to move production overseas.
Tax Breaks for Middle-Class Americans
For low- and middle-income Americans, many of the tax increases proposed by Biden wouldn’t even be noticed. Others could find some pleasant surprises. Here’s a breakdown of the tax breaks proposed for the middle class:
- Temporarily increasing the Child Tax Credit from its current maximum of $2,000 to $3,000 per child for children ages 6-17 and to $3,600 for children under 6.
- Expanding Child and Dependent Care Credit — to assist with the costs of daycare — from its current $3,000 maximum to as much as $8,000 per child. This could potentially help stave off today’s exorbitant child care costs.
- Forgiving student loan debt and excluding forgiven amount from taxation.
- Creating a $5,000 tax credit for informal caregivers providing long-term care to the elderly, and allowing such caregivers to make catch-up contributions to retirement accounts.
- Establishing a refundable tax credit of up to $15,000 for first-time homebuyers, which would be payable to qualified taxpayers upon purchase rather than upon filing a tax return. His plan would also enact a new renter’s tax credit to reduce costs for renters.
- Restoring the full electric vehicle tax credit as part of climate change action. This credit originally applied to any electric vehicle purchase in or after 2010, but the law eventually changed to exclude or be reduced for certain car makes and models, including Tesla. Biden’s change would provide full credit for all electric vehicles.
Obviously, these are only predictions, and the months ahead will prove interesting as we see some or all of these new laws tweaked, passed, or rejected. In the meantime, if you’re concerned about your own standing as it pertains to potential tax law changes, contact us! We’re happy to sit down and talk you through how you could be affected and offer suggestions to help mitigate any negative impacts.
Best wishes for a happy holiday season and MUCH better new year!