Earlier this month, Joseph Biden was announced as the predicted winner of the 2020 U.S. presidential election. As with most presidential candidates, on the campaign trail, Biden proposed changing the tax laws. He aims to increase taxes on corporations and “high-income” individuals (i.e., those with income over $400,000) and proposes various incentives for the “middle-class,” U.S. productivity, and alternative energy.
The purpose of this tax alert is to provide a high-level overview of some of the tax policies that Biden has proposed during his campaign. Please note, these proposals are not set in stone and there is no pending tax legislation before Congress.
Individual Income Taxes
The TCJA reduced the maximum individual income tax rate, through 2025, from 39.6% to 37%. Under Biden’s proposal, the top rate would revert to 39.6%, in accordance with his plan to raise taxes on individuals with taxable income greater than $400,000.
Currently, the Code provides preferential income tax treatment for long-term capital gains and qualified dividends in the form of a 20% maximum tax rate (23.8% including the net investment income tax). Biden proposes to repeal the preferential rate for taxpayers with income of more than $1 million by taxing capital gains at ordinary rates. As a result, certain taxpayers would be subject to a maximum ordinary income rate of 39.6% on investment income.
Among the TCJA’s changes included a limit on the deduction for state and local income, sales, and property taxes to a combined deduction, and the repeal of miscellaneous itemized deductions. Biden would cap the value of itemized deductions (including charitable deductions) to 28% for those earning over $400,000. He would also restore the “Pease” limitation on itemized deductions.
Estate and Gift Tax
Currently, estates are subject to a top federal tax rate of 40% after the exemption threshold is surpassed. For 2020, the exemption is $11.58 million per taxpayer (indexed to inflation), which is approximately double the exemption before the TCJA. Also, beneficiaries can inherit certain property, such as real estate and stocks, with a cost basis that is “stepped up” to fair market value. The step up reduces the amount of gain recognized upon eventual disposition of the asset.
Under Biden’s tax plan, the top estate tax rate would increase from 40% to 45%. Moreover, the estate tax exemption would decrease from $11.58 million per taxpayer to as low as $3.5 million (i.e., 2009 levels). He also proposes to eliminate the “basis step-up” for inherited assets, purportedly by taxing the donor on appreciated property at death, subject to a per-person exclusion amount.
Under current law, a Social Security payroll tax of 12.4% is split equally between employers and employees on wages up to a certain threshold; for 2020, it is $137,700 (adjusted for inflation). In addition to this tax, Biden would impose the same 12.4% Social Security tax on wages that exceed $400,000. Note, wages between $137,700 and $400,000 would not be taxed.
The TCJA changed the corporate tax rate from a graduated system with a top rate of 35% to a flat 21% tax rate. Biden would maintain the elimination of the graduated system but wants to increase the flat tax rate from 21% to 28%.
In addition to the 28% corporate tax rate, Biden has proposed a 10% surtax on the profits of foreign production, otherwise known as the “offshoring tax penalty.” To encourage domestic production, he has also proposed a 10% credit for certain expenses paid to return production to the U.S., to revitalize manufacturing facilities, and to increase wages paid to U.S. manufacturing workers.
The TCJA enacted Sec. 199A, which introduces a 20% pass-through deduction for qualified business income (“QBI”). Although it is set to expire after 2025, Biden proposes to repeal the deduction for taxpayers who have more than $400,000 of income.
On the one hand, Biden proposes to eliminate “tax cuts” for high-income real estate investors and repeal tax incentives for the fossil fuel industry. On the other hand, he also proposes to extend and introduce tax incentives to promote alternative energy and to expand the new markets tax credit, the work opportunity tax credit, and the low-income housing credit.
Other Biden tax proposals that would affect businesses include a new 15% minimum tax on global book income for companies that have more than $100 million of net income on their financial statements but owe no U.S. income tax.
To reduce the incentive to shift corporate profits out of the U.S., the TCJA introduced a new tax on global intangible low tax income (“GILTI”). This regime imposes a 10.5% tax on earnings that exceed a 10% return on a company’s invested foreign assets. Biden would increase the GILTI rate from 10.5% to 21% and eliminate the 10% return exemption.
GILTI would also be computed on a country-by-country basis to deter companies from offsetting GILTI based on jurisdiction.
At this time, we can only speculate on what tax legislation under the Biden administration would look like. Given the current political and economic climate (such as the Georgia Senate runoff and the COVID-19 pandemic), it is unlikely that a tax bill will be passed in 2021. Moreover, the possibility that Biden’s tax proposals will be enacted in their current form is remote.
Nevertheless, there are certain tax planning steps that taxpayers can take despite this uncertainty. For example, taxpayers can adjust their estate plan to take advantage of the lower-interest rate environment by using grantor retained annuity trusts (“GRATs”) or spousal lifetime access trusts (“SLATs”). Those with incomes over $400,000 can accelerate certain deductions, such as those for charitable giving, into 2020 or 2021.
In the context of M&A, we might advise taxpayers that anticipate selling their business to accelerate the sale into 2020 or 2021 to take advantage of current capital gains tax rates. Moreover, if Biden tax legislation is introduced, then sellers can proactively elect out of the installment method for deferred payments and recognize all gain in the year of sale.
The Tax Advisory group will continue to stay abreast of any tax developments, and proposed changes to the tax code. For any tax-related questions specific to this Tax Alert, please contact any of the following individuals:
Name: Meghan Andersson, JD, LLM, CM&AA
Office: Irvine, CA
Phone: (949) 623-0542 Email: firstname.lastname@example.org
Name: Jason Borkes, CPA, CM&AA
Office: Irvine, CA
Phone: (949) 623-0516 Email: email@example.com
Name: Mark Cook, MBA, CPA, CGMA
Office: Irvine, CA
Phone: (949) 623-0478 Email: firstname.lastname@example.org