Get ready to be bent over. These are guaranteed to pass.
President-elect Biden’s major tax proposals
1. Higher maximum rate
The pre-election Biden tax plan would raise the top individual federal income rate on ordinary income and net short-term capital gains back to 39.6%, the top rate that was in effect before the Tax Cuts and Jobs Act (TCJA) lowered it to 37% for 2018-2025. Biden also said he would generally raise taxes on folks with incomes above $400,000 without supplying specifics.
2. Itemized deductions
Biden has said he would limit the tax benefit of itemized deductions to 28% for upper-income individuals. In other words, each dollar of allowable itemized deductions could not lower your federal income tax bill by more than 28 cents, even if you are in the proposed 39.6% maximum tax bracket.
For upper-income individuals, Biden would reinstate the pre-TCJA rule that reduces total allowable itemized deductions above the applicable income threshold. Allowable deductions are reduced by 3 cents for every dollar of income above the threshold.
Biden would eliminate the TCJA’s $10,000 cap on itemized deductions for state and local taxes.
3. Higher maximum rate on long-term capital gains
Upper-income individuals would face higher capital gains taxes under the Biden plan. Under current law, the maximum effective federal income tax rate on net long-term capital gains and qualified dividends recognized by individual taxpayers is 23.8%, as explained in the main body of this column. Under the Biden plan, net long-term gains (and presumably dividends) collected by those with incomes above $1 million would be taxed at the same 39.6% maximum rate that is proposed for ordinary income and net short-term capital gains. With the 3.8% NIIT add-on, the maximum effective rate on net long-term gains would 43.4% (39.6% plus 3.8%). That would be almost double the current maximum effective rate of “only” 23.8%.
4. Higher Social Security taxes for upper-income individuals
Under current law, the 12.4% Social Security tax hits the first $137,700 of 2020 wages or net self-employment income. Employees pay 6.2% via withholding from paychecks, and employers pay the remaining 6.2%. Self-employed individuals pay the entire 12.4% out of their own pockets via the self-employment (SE) tax. For 2020, the 12.4% Social Security tax cuts out once 2020 wages or net SE income exceed the $137,700 ceiling. For 2021 and beyond, the Social Security tax ceiling will be adjusted annually to account for inflation. As things currently stand, the 2021 ceiling will rise to $142,800.
The Biden tax plan would restart the 12.4% Social Security tax on wages and net SE income above $400,000. This is the so-called donut hole approach to increasing the Social Security tax. Over the years, the donut hole would gradually close as the lower edge of the hole is adjusted upward for inflation while the $400,000 upper edge of the hole remains static.
5. Elimination of basis step-up for inherited assets
Under current law, the federal income tax basis of an inherited capital-gain asset is stepped up fair market value as of the decedent’s date of death. So, if heirs sell inherited capital-gain assets, they only owe federal capital gains tax on the post-death appreciation, if any. This provision can be a huge tax-saver for greatly-appreciated inherited assets — such as personal residences that were acquired many years ago for next to nothing and are now worth millions. The Biden plan would eliminate this tax-saving provision.
6. Elimination of real-estate tax breaks
The Biden tax plan would: (1) eliminate the $25,000 exemption from the passive loss rules for rental real estate losses incurred by middle-income individuals, (2) eliminate Section 1031 like-kind exchanges that allow deferral of capital gains taxes on swaps of appreciated real property, (3) eliminate rules that allow faster depreciation write-offs for certain real property, and (4) eliminate qualified business income (QBI) deductions for profitable rental real estate activities.
7. Increased child- and dependent-care credits
Under current law, parents can collect a credit of up to $2,000 for each under-age-13 qualifying child. This is a refundable credit, which means you don’t have to have any federal income tax liability to collect the credit. In other words, the child credit is “free money.”
Under current law, another credit of up to $2,100 is allowed to cover expenses to care for a qualifying dependent, including an eligible child, or up to $4,200 for expenses to care for two or more qualifying dependents. In most cases, however, an income limitation reduces the maximum allowable credit to $1,200 or $2,400 for two or more qualifying dependents.
The Biden tax plan would increase the maximum refundable child credit to $4,000 for one qualifying child or $8,000 for two or more qualifying children. Families making between $125,000 and $400,000 would receive reduced credits. Apparently, the same rules would apply to an enhanced credit for expenses to care for qualifying dependents.
Biden would also establish a new credit of up to $5,000 for informal caregivers.
8. New credits for homebuyers and renters
The Biden plan would create a new refundable tax credit of up to $15,000 for eligible first-time homebuyers. The credit could be collected when a home is purchased, rather than later at tax-return filing time. Biden would also establish a new refundable tax credit for low-income renters. The credit would be intended to hold rent and utility payments to 30% of monthly income.
9. ‘Green energy’ tax changes
Biden would reinstate or expand tax incentives intended to reduce carbon emissions — such as deductions for emission-reducing investments in residential and commercial buildings and restored credits for buying electric vehicles produced by manufacturers whose credits have been phased-out under current law. Biden would also eliminate federal income tax deductions for oil and gas drilling costs and depletion.
10. And finally…
One of the biggest changes in the 2017 Tax Cuts and Jobs Act (TCJA) was the installation of a flat 21% corporate federal income tax rate for 2018 and beyond. Before the TCJA, the maximum effective rate for profitable corporations was 35%. The Biden plan would increase the corporate tax rate to 28%. This change would raise an estimated $1.1 trillion or so over 10 years.
The Biden plan would impose a new 15% minimum tax on corporations with at least $100 million in annual income that pay little or no federal income tax under the “regular rules.” An affected corporation would pay the greater of: (1) the “regular” federal income tax bill or (2) 15% of reported book net income. This new tax would raise an estimated $160 billion to $320 billion over 10 years
