The aim of this article is to discuss some of the possible changes to our tax laws as a result of Joe Biden’s victory in the recent presidential election and the resulting impact on tax planning later this year. The individual tax rate structure has been reduced by the Tax Reduction and Jobs Act 2017 (TCJA). According to this law, the currently highest marginal tax rate is 37 percent. This rate would apply to taxable income exceeding $ 523,600 in 2021. President-elect Biden has proposed raising this highest rate to 39.6 percent, which was the highest marginal tax rate before the TCJA. President-elect Biden further stated that only taxpayers with incomes over $ 400,000 would see their income taxes increase. These two statements taken together make it unclear what level of income the highest proposed rate would apply to.
Long-term capital gains and qualified dividends are currently taxed at lower rates than ordinary income. In particular, these items of income are currently taxed at 0 percent, 15 percent or 20 percent, depending on the income level of an individual taxpayer. President-elect Biden has proposed an increase in the top tax rate for taxpayers who earn more than $ 1,000,000 a year. The proposed rate would essentially double to more than 40 percent. President-elect Biden has also proposed removing the capital gain base top-up on the estate of a deceased person. This change would mean that heirs would no longer receive this type of property free from possible future tax liability.
Prior to the TCJA, total itemized deductions were limited for high income taxpayers. For example, in 2017 taxable income of $ 318,700 for taxpayers filing together and $ 156,900 for individual taxpayers was subject to the rules limiting individual deductions. The TCJA removed these restrictions for all taxpayers. President-elect Biden has proposed reinstating restrictions on taxpayers who earn more than $ 400,000 annually.
Tax credits reduce a taxpayer’s liability on a dollar basis and are therefore more valuable to the taxpayer than a similar amount that is classified as a tax deduction. Additionally, a refundable credit can reduce the taxpayer’s liability to zero and result in the taxpayer reviewing the remaining balance for a tax refund. Under applicable tax law, there is a child tax credit of $ 2,000 for each eligible child under the age of 17 and a tax credit of $ 500 for other dependents. This credit is only partially refundable if certain conditions are met. President-elect Biden has proposed a loan of $ 8,000 for one qualified child and $ 16,000 for two or more qualified children. Furthermore, this credit would be fully refunded according to Biden’s proposal. In addition, Biden has proposed to expand the Earned Income Credit and the Dependent Care Credit.
Under TCJA, the corporate income tax structure was almost halved and the alternative minimum tax on corporations was eliminated. The corporate income tax rate is currently 21 percent. President-elect Biden has proposed raising the tax rate to 28 percent and reintroducing the alternative minimum tax for companies with profits of $ 100,000,000 or more.
The TCJA has introduced the Qualified Business Income Deduction (QBI) for non-companies. Generally, this deduction is equivalent to 20 percent of the company’s qualified business income. President-elect Biden has proposed phasing out the QBI deduction for income over $ 400,000. Finally, Biden proposed that each taxpayer should be forgiven a $ 10,000 student loan debt. A Congressional resolution was recently discussed that would pardon student debt for amounts up to $ 50,000.
From the above suggestions, it can be concluded that the in-depth administration intends to increase the tax liability for wealthy taxpayers. It also appears that the rich could be defined in this context as taxpayers with incomes of $ 400,000 or more. It must also be emphasized here that these are all current proposals and not enacted tax laws. In view of this restriction, tax planning must be situation-specific. That is, for a particular anticipated transaction, the wise taxpayer should determine the tax cost under the applicable tax law and again under the proposed new tax rules that are expected to become law. Then the probability of the different scenarios must be taken into account. Obviously, this is a complex process that should be performed by a tax professional. If a taxpayer is contemplating a significant financial transaction in the near future, the taxpayer should consult their chosen tax advisor prior to closing the transaction.