President Trump oversaw the passing of the Tax Cut and Jobs Act (TCJA) in 2017, with tax reforms designed to promote economic growth which affected corporations, small businesses, and individuals. Former Vice President and Democratic presidential nominee Joe Biden has proposed a tax plan that challenges several aspects of the current system, in an effort to raise federal tax revenues and address income/wealth inequality. We summarize key components of Biden’s tax plan in this article.
Under the Biden proposal, those making $400,000 or more per year would have a marginal tax rate of 39.6%, the pre-TCJA limit. It’s unclear whether this $400,000 is for single or joint filers. The Biden plan would also eliminate the Qualified Business Income (QBI) tax deduction for pass-through owners whose income is $400,000 or more, effectively increasing their tax liability by another 10%. The value of itemized deductions would be capped at 28%.
Retirement Plan Contributions
Another feature of the Biden plan is a flat retirement contribution credit, determined by a specific percentage, currently anticipated to be 26%, and would replace the deduction of retirement plan contributions. This would lower the tax bill for those whose tax rate is less than 26% and increase it for those whose tax rate is more than 26%.
Personal Income Tax Credits
The Biden proposal would increase the Child Tax Credit from $2000 for those under 17 to $3600 for children under 6 and $3000 for all other children under 17. The Child and Dependent Care Credit would increase from $3000 to $8000 for one child, and from $6000 to $16,000 for two or more children. The First-Time Home Buyer Credit would be reintroduced as a refundable and advanceable credit of up to $15,000, and a new proposed Caregiver Credit would provide a $5000 credit for informal long-term caregivers.
Long-term capital gains and qualified dividends would be taxed at ordinary income rates for those with income over $1 million. The 3.8% surtax on net investment income would remain in place. 1031 Exchanges would be eliminated for those with annual incomes over $400,000.
Under current tax law, and for as long as I can remember, inherited assets received a “step-up” in tax basis. Your parents bought a home for $30,000 forty years ago, you inherit it, and it is now worth $300,000. Your tax basis is $300,000. You sell it for $310,000, and report $10,000 as taxable gain. Under the Biden tax plan, your tax basis is what your parents paid for the home. You sell the same home for $310,000, and report $280,000 as taxable gain.
Under current law, the first $11.58 million of assets is exempt from estate taxes. Under the Biden plan, this drops by 50% to $5.79 million.
That’s a short summary. Look for webinar announcements once we know election results. We will be discussing how to prepare for 2021 and beyond, based on election outcomes.
Look for an article on year-end planning tips.
As always, let us know if and as you have questions, and how we can best help.