The recent election has given Democrats control of the House and Senate for the first time since 2011. With that control, it is a foregone conclusion that President Biden’s tax plan will have enough votes to become law. So, what exactly is Biden’s tax plan?
The overriding theme in Biden’s tax policy is to increase taxes high income earners and corporations other than small businesses. This policy change is a significant departure from the policy of major tax reductions enacted during Trump’s administration and looks to generate substantial revenue aimed at dealing with the federal budget, as well as fiscal issues.
The following are some of the key tax changes proposed by Biden during his presidential campaign.
- Ordinary Income Tax Rates: Increase the top rate to 39.6% for taxpayers making more than $400,000. The current system has seven tax brackets with the top rate at 37%.
- Capital Gain Rates: Tax capital gain income at the top ordinary income rate of 39.6% for taxpayers with over $1 million of income. The current top capital gain rate is 20%, plus the 3.8% net investment income tax. The plan also calls for the elimination of a step-up in basis for capital gain taxation that occurs in a taxpayer’s estate upon death.
- Tax Credits: Increase the Child Tax Credit to $3,000 per child, up from $2,000 under current law. Biden wants to expand the Earned Income Tax Credit (EITC), Child Care Credit and Work Opportunity Tax Credit, and reestablish the First-Time Homebuyers’ Tax Credit providing up to $15,000 for qualified taxpayers.
- Itemized Deductions: Limit the tax benefit of itemized deductions to 28% and restore the Pease limitation for taxpayers with income over $400,000. Biden also proposes a repeal of the $10,000 cap on state and local tax deductions.
Employment/Social Security Taxes
Biden proposes to expand social security tax to apply to taxpayers’ earnings in excess of $400,000. He also advocates modifying rules of employee classification, making it more difficult for employers to avoid employment taxes by classifying workers as independent contractors. Note: California currently has worker classification laws that are more stringent than current federal laws.
- Corporate Tax Rates: Increase the corporate income tax rate from 21% to 28% and reintroduce a minimum tax on corporations with book profits of $100 million or more.
- Phase-out of 199A Deduction: Reduce tax benefits for the Qualified Business Income Deduction to end special qualifying rules including those for real estate investors and phase-out the deduction for taxpayers making more than $400,000.
- Global Intangible Low-Taxed Income (GILTI): Double the effective tax rate on GILTI earned by foreign companies controlled by American shareholders from 10.5% to 21%.
- Manufacturing Communities Tax Credit: Establish a Manufacturing Communities Tax Credit to promote investment in modernizing and revitalizing facilities.
- Small Business Retirement Plan Incentives: Widely adopts workplace savings plans and proposes to offer tax credits to small businesses adopting employer retirement savings plans.
- Renewable Energy: Expand various renewable-energy related tax credits including credits for carbon capture, use, and storage, residential energy efficiency, and restore the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit.
- “Made in America” Tax Credit: Establish a 10% tax credit applicable to qualifying expenses to revitalize closed or nearly closed facilities, retool or expand facilities, and bring production or service jobs back to the U.S., creating U.S. jobs. It will also apply when a company is increasing manufacturing wages above the pre-COVID baseline for jobs paying up to $100,000.
- 1031 Exchanges: Eliminate unproductive and unequal tax breaks for real estate investors making over $400,000, which many interpret to mean like-kind exchanges.
As with any new administration’s tax plan, the list is long and the final version that will become law is unknown. Biden’s plan is a substantial overall change in tax policy from the Trump administration. His plan increases taxes for wealthy individuals and big business, while offering incentives for American businesses, environmentally friendly production, and expanding tax credits. We continue to closely watch for future changes.