Big changes to make in 2020 to position you for Biden’s tax reform
We’ve been getting many variations of this question: “What should I do to prepare for Biden’s tax reform?”. Let’s start by recapping what President-elect Joe Biden has laid out for his overall tax plan.
- Raise the top individual Income tax rate back to 39.6%. President Trump’s Tax Cuts and Jobs Act (TJCA) temporarily lowered the top rate from 39.6% to 37% until 2026.
- Make wages above $400,000 subject to the Social Security payroll tax. Currently, wages above $137,700 aren’t subject to the tax. He’s suggesting the payroll tax kicks back in at $400,000+ of wages.
- Phase-out the Qualified Business Income (QBI) deduction that was added by TJCA – for small business owners making more than $400,000 per year.
- End favorable tax rates on capital gains for anyone making over $1 million per year. Long-term capital gains tax would be paid at 39.6% rather than 20%. This number could go as high as 43.4% if the 3.8% surtax on net investment income stays put.
- Cap the value of itemized deductions at 28%. Reducing the total amount of itemized deductions for anyone paying a marginal tax rate above 28% means a high earner currently getting a 37% tax reduction for every dollar spent on charitable donations would only get a 28% tax reduction.
- Reverse the TJCA’s repeal of the Pease limitation. Phase-out itemized deductions for people earning more than $400,000 per year.
- Lowering the federal estate tax exemption – likely back to pre-TJCA levels (estates over ~$5.5M are taxed 40%).
- Eliminate the step-up in basis for inherited capital assets. Inheritors of low basis stock will likely owe 15% or 20% on the gains.
- Increase the child tax credit – from $2,000 to $3,000 for children 17 or younger and provide a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
- Expand the child and dependent care tax credit – from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increase the maximum reimbursement rate from 35 percent to 50 percent.
- Changes to corporations – raise corporate taxes from 21% to 28%, impose a 15% minimum tax on large corporations, and take away certain corporate tax breaks.
Note: Even if your annual salary is below $400,000 it does not mean you’ll undeniably escape Biden’s proposed tax increases. For example, boosting income taxes could ultimately raise taxes for workers, and selling inherited low-basis stock could land you significant capital gains tax.
So, what should you do with all this data? Remember, the president cannot raise and lower taxes on his own. Congress has to pass the legislation and since it’s looking like Republicans will most likely retain control of the Senate for at least two years, Biden will likely have a tough time getting these proposals enacted into law. Not to mention, it won’t be at the top of his agenda given the more pressing concerns the pandemic has created on the economy.
Therefore, we’re anticipating that the Ways and Means Committee won’t have the tax situation figured out until roughly 2022. Many investors and professionals speculate that taxes will inevitably arise in the future and are providing tax-saving tips to implement today. MainStreet recommends you work with us to identify tax moves to make based on your individual financial circumstances, rather than implement drastic changes in 2020 based on speculation about future tax increases. Because if we’ve learned anything from 2020, it’s that tomorrow is uncertain.