President Elect Biden's Tax Proposals Affecting Individual Taxpayers

With a President-elect Joseph Biden taking office on January 20th, many people are wondering about potential tax law changes. Mr. Biden has not produced a single comprehensive tax plan, probably by design.  Instead, his proposals have been gleaned from various sources, including a tax-related document on his website, statements made during the campaign, and the Biden-Sanders Unity Tax Force Recommendations. 

Mr. Biden has said that he would seek (1) increased taxes for regular corporations, (2) somewhat higher income taxes for individuals making over $400,000 and perhaps bigger tax hikes for those making over $1 million, (3) a return of estate and gift taxes to “historic norms,” (4) modest tax cuts for lower and moderate income taxpayers, and (5) payroll tax increases for high earners to shore up the Social Security system. 

With the government’s nearly $4 trillion of 2020 pandemic related borrowing, an amount representing about an entire normal year’s budget, and with more to come, it does seem that some level of tax hikes are in the cards.  But dealing with the health and economic impacts of the pandemic will undoubtedly consume much of Mr. Biden’s time for his first year, most likely putting comprehensive tax legislation on the back burner. And the still unknown balance of power in Congress also plays into speculation about the likelihood, extent, and timing of Mr. Biden’s tax proposals becoming law. 

Mr. Biden has signaled a desire to make the following tax law changes:

• Increase individual tax rates for taxpayers earning over $400,000 with the top rate going from 35% to 39.6%, the same as it was during the Clinton and most of the Obama administrations.
• Cap itemized deductions at 28% of their value.
• Restore the Pease limitation to reduce itemized deductions by 3% of the excess of AGI over $400,000.
• Treat long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income over $1 million.
• Shore up the Social Security system by applying the Social Security payroll tax to wages and self-employment income over $400,000, creating a “donut hole” between $137,700 and $400,000 where the tax doesn’t apply.
• Eliminate the Section 199A qualified business income deduction for taxpayers making $400,000 or more but keep it for those making less.
• Eliminate Section 1031 tax-free real estate exchanges.
• Limit the ability of real estate investors to deduct passive losses against unrelated passive income.
• Reduce the federal estate/gift tax exemption to “historic norms,” probably meaning half of the current $11.58 million and possibly raising the top rate from 40% to 45%.
• Potentially eliminate the step-up in basis for inherited property or requiring estates to pay capital gains tax on appreciated property.
• Enhance the child tax credit through the end of the pandemic.
• Increase the dependent care credit.
• Provide a tax credit for informal caregivers.
• Provide a tax credit for first time home buyers.
• Enhance and restore the green energy credits for electric vehicles and energy efficient home improvements.
• Allow people to withdraw money from IRAs tax and penalty-free to purchase long-term care insurance.
• Remove the income cap on eligibility for the Affordable Care Act premium tax credit.
• Increase IRS enforcement for wealthy taxpayers and individuals with complex business structures.
• Address the misclassification of employees as independent contractors.
• Increase the corporate tax rate from 21% to 28%, primarily affecting large publicly traded companies but also impacting smaller “C” corporations (although most small businesses are taxed as “S” corporations or LLCs).

In terms of proactive planning, taxpayers may want to consider accelerating income if they can do so in a manner that is not otherwise detrimental, but should not act rashly.  Similarly, if it becomes likely that the special capital gains rate will be eliminated for people earning over $1 million, that may be a reason for those potentially subject to the higher rate to trigger gains sooner. Most importantly, taxpayers should pay attention to forthcoming tax discussions in Congress.  As proposals are negotiated and revised it may be easier to make educated guesses about what is likely to be enacted and the resulting risk and opportunities.   At that point, logical tax planning strategies may become clearer.